20

Mar

As we find ourselves in unsettling times following the Coronavirus outbreak, BOE rate cut and ongoing market volatility, we wanted to highlight one of the key elements that an advisor must consider when managing a client’s portfolio, which is when and how frequently to rebalance back to target weights.

The key element of a diversified portfolio is the fact that asset prices move in different directions, especially when allocating between negatively correlated assets such as equities and bonds. This aspect of capital markets can help reduce the volatility of a portfolio that is broadly spread across asset classes. But following sharp market moves, as we have seen in recent weeks, this can lead to a misalignment between the desired allocation and reality.

Rebalancing, or selling a portfolio’s best performers to buy the worst performers periodically, is one of the best ways to protect against market movements altering a portfolio’s risk profile.

Morningstar research indicates that during the past two bear markets a buy-and-hold portfolio lost more than a rebalanced portfolio and the rebalanced portfolio recovered faster after it troughed. In addition, given what research has shown about investor behaviour, investors struggle to hold on during severe drawdowns. They often sell out of their declining equity positions for safer havens, locking in losses, extending the recovery period, and consequently hampering overall performance.

The experience of a buy-and-hold portfolio can be tumultuous, but rebalancing can help smooth out the ride. Daily, monthly, or even quarterly rebalancing may be an unrealistic expectation, but a combination of annual rebalancing and periodic reviews for large fluctuations, such as the recent 5% plus deviations, should be within the realm of possibility. Morningstar research shows that doing so will lead to better outcomes over the long term relative to buy-and-hold investors.

In summary, it’s tough to predict where the market is headed, but we can control our portfolio’s risk exposure through prudent rebalancing, and history suggests that will lead to better results for investors.

16

Mar

In recent times we have witnessed volatile markets which have dramatically impacted the values of investments. Uncertainties over global events such as the Coronavirus can cause markets to behave in an extremely volatile manner. Naturally, our first thoughts are with those impacted by this illness. However, we also understand that volatility in investment markets can be unsettling for our clients.

By way of a reminder, our investment process is always geared towards the medium to long term. Above all else, financial markets dislike uncertainty. Yet markets are also prone to over-react to events that cloud the short-term outlook, both on the upside and downside. When markets are volatile, it can be tempting to exit the market or switch to cash in an attempt to reduce further expected losses. However, it is impossible to time these movements with any degree of certainty, so not only would you be potentially crystallising a loss but being out of the market by just a few days can have a devastating impact on the overall returns of a portfolio once markets start to recover. Historically investments of this nature have over the medium to long term outperformed less volatile forms of investment, such as cash.

19

Dec

Key Takeaways

  • To build a robust portfolio, we believe 12-steps need to be agreed and practiced consistently.
  • This process helps take a complex operating system and simplifies it into actionable stages.
  • This is the structure that all portfolios overseen by Morningstar Investment Management follow, providing dependability of approach.

Investing is often about taking the complex and simplifying it into digestible and relevant chunks. If this can be done repeatedly, you’re well on your way to healthy risk-adjusted returns. With this in mind, we thought it would be useful to highlight why we decided on a 12-step process that can be consistently used for portfolio construction—including why this helps an investor to reach their goals.

To start, we must agree that building anything worthwhile requires three core pieces of knowledge. We’ve drawn a parallel with how one would select a sports team, but the same applies if building a house, building a ship or building a portfolio:
• Appreciate the rules—know the goal, including the parameters and any constraints.
• Rank the players—obtain a thorough understanding of each implementation option, accounting for both the expected reward and any associated risk.
• Select the team—take all available information, consider how each implementation option might work together and find the most appropriate overall solution.

Of course, we must highlight that this process is iterative. We never know how a given player will perform on a given day, nor whether a storm will hit, but if the framework is holistically followed it should produce results over the long term. Turning this into a specific investment framework, the 12-steps we believe are best placed to help investors are as follows:

1. Outlining investment objectives
2. Identify portfolio constraints
3. Determine portfolio construction rules
4. Identify investments available for inclusion
5. Understand reward versus risk
6. Assigning conviction levels
7. Ranking the opportunity set
8. Producing all feasible portfolio iterations
9. Development of portfolio quality characteristics
10. Identify the most attractive portfolio composition
11. Iterate portfolio sizing
12. Finalise portfolio allocations

Collectively, these steps allow us to deliver a clear investment process that increases the likelihood of reaching an investors’ goals.

Taking all of the above, we are finally in a position to select the most appropriate solution. This judgment-driven stage allows us to maximise the potential of the portfolio and account for the complexity of investment risk. To prepare investors for the future, the investment team use their expertise to construct robust investment solutions designed to perform well in different environments rather than being considered “optimal” based on expected results or a specific environment.

As a general rule, we avoid short-term forecasts based on one’s ability to predict specific environments. Instead, we aim to prepare for different environments through constructing portfolios that will hold up under many possible scenarios—even ones that we haven’t seen before. In effect, this involves trade-offs to deal with the probability and impact of negative outcomes.

This provides accountability and ultimately helps ensure the outcomes are in line with the best interests of an end-investor.

(We’re a well-established local firm of Independent Financial Advisers, covering Hampshire, Surrey and Sussex.

Our success is based on building strong, lasting relationships with our clients through a friendly, personalised and professional service (Chartered Financial Planner). Acting with integrity in everything we do, helping clients in making life’s big financial decisions, to provide them with peace of mind at every stage.

We provide genuinely independent Wealth Management and Financial Planning services, specialising in Investment Advice, Pension Reviews (including providing advice on Defined Benefit (DB)/Final Salary pension transfers & Commercial Property SIPPs), Investment/Pension Portfolio Management, Options at Retirement, Estate Preservation (Inheritance Tax Planning), Trusts and Funding Solutions for Long-Term Care.

Being independent means we can provide impartial and unbiased advice that you can trust, assessing the whole marketplace to find you the most beneficial and cost-effective solution. The best interests of our clients are at the heart of everything we do and our main focus is to help them in achieving their financial ambitions both now and in the future.)

4

Jul

We are a local firm of Independent Financial Advisers, covering Hampshire, Surrey and Sussex.

Our success is based on building strong, lasting relationships with our clients through a friendly, personalised and professional service (Chartered Financial Planner). Acting with integrity in everything we do, helping clients in making life’s big financial decisions, to provide them with peace of mind at every stage.

We provide genuinely independent Wealth Management and Financial Planning services, specialising in Investment Advice, Pension Reviews (including providing advice on Defined Benefit (DB)/Final Salary pension transfers & Commercial Property SIPPs), Investment/Pension Portfolio Management, Options at Retirement, Estate Preservation (Inheritance Tax Planning), Trusts and Funding Solutions for Long-Term Care.

Being independent means, we can provide impartial and unbiased advice that you can trust, assessing the whole marketplace to find you the most beneficial and cost-effective solution.

The best interests of our clients are at the heart of everything we do and our main focus is to help them in achieving their financial ambitions both now and in the future.

Your local connection to the global financial world.

12

Jun

We are thrilled to announce that Stiles & Company Financial Services (Petersfield) has been awarded the Gold Standard for Pension Transfer Advice and is following best practice on Defined Benefit Pension transfers.

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