The year ahead | How might you prepare your portfolio
2020 is now behind us and most of us breathed a collective sigh of relief. Thankfully our worst fears about the health impact of COVID-19 on our country have not come to pass and to date the economic impact on most households has been muted.
From an investment perspective, 2020 was a very strong year with growth focused investment strategies posting double-digit after-tax returns. This was a far cry from many predictions that were made at the start of the global pandemic. However, this does beg the question, could 2021 be the ‘hangover’ year; the year in which the economic stresses that were anticipated in 2020 finally have an impact?
In last month’s column I commented on the many doom merchants whose ‘expert’ predictions in such areas as housing were proved to be completely wrong; so I am certainly not going to be advocating becoming overly pessimistic at this point. However, it is worth asking the question, are there specific actions that I should be taking with my investment strategy at this point?
Asset allocation. As I have mentioned before (but it bears repeating) your asset allocation determines more than 70% of your investment return. After a period of very strong growth, it is important to rebalance your portfolio back to your agreed asset allocation. This may involve the counter intuitive process of moving some capital away from the fastest growing parts of your portfolio and potentially investing in areas where the performance has been more subdued.
The key point here is that you need to maintain the asset allocation that is consistent with your age, stage and personal views on risk. Failure to do this tends to lead to the concentration of risk in potentially overvalued assets. If we do see a strong downward market movement then it is possible that you will give up more of your hard-won gains than if you had rebalanced correctly.
Management style. The debate between the merits of so-called passive investing (sometimes called index investing) vs active management continues in various media. Personally, I am of the view that it pays to be agnostic on this issue and be willing to move between styles.
With twenty-twenty hindsight we can now see that investment returns in the year 2020 were as much driven by the companies you were not invested in as those selected. It was a year where active management to help protect capital during the strong downward swings added considerable value. The ability to then reengage by moving to overweight exposure to the more favoured sectors of the ‘stay at home economy’ drove very strong performances.
I suspect that 2021 may require the same level of active management and may be a year that favours an active approach once again.
Have a plan. It probably won’t come as a surprise to anyone that I am a strong advocate of the planning process. For retired clients, the cashflow modelling part of the plan enables them to see the sustainability of regular future drawings.
When we see periods of excess return, as we have just experienced, it is often a prompt to bring forward intermittent expenditure such as house maintenance or vehicle replacement. A plan provides the confidence to make such withdrawals in the knowledge that it is unlikely to compromise future drawings.
I am sure that in 2021 investment markets will be volatile at times; delays in the global distribution of vaccines and questions about the emergence of new strains of the virus will no doubt have an impact.
However, I am confident that a well-structured, properly diversified and managed portfolio will continue to provide the best protection of wealth in an uncertain world.
From an investment perspective, 2020 was a very strong year with growth focused investment strategies posting double-digit after-tax returns. This was a far cry from many predictions that were made at the start of the global pandemic. However, this does beg the question, could 2021 be the ‘hangover’ year; the year in which the economic stresses that were anticipated in 2020 finally have an impact?
In last month’s column I commented on the many doom merchants whose ‘expert’ predictions in such areas as housing were proved to be completely wrong; so I am certainly not going to be advocating becoming overly pessimistic at this point. However, it is worth asking the question, are there specific actions that I should be taking with my investment strategy at this point?
Asset allocation. As I have mentioned before (but it bears repeating) your asset allocation determines more than 70% of your investment return. After a period of very strong growth, it is important to rebalance your portfolio back to your agreed asset allocation. This may involve the counter intuitive process of moving some capital away from the fastest growing parts of your portfolio and potentially investing in areas where the performance has been more subdued.
The key point here is that you need to maintain the asset allocation that is consistent with your age, stage and personal views on risk. Failure to do this tends to lead to the concentration of risk in potentially overvalued assets. If we do see a strong downward market movement then it is possible that you will give up more of your hard-won gains than if you had rebalanced correctly.
Management style. The debate between the merits of so-called passive investing (sometimes called index investing) vs active management continues in various media. Personally, I am of the view that it pays to be agnostic on this issue and be willing to move between styles.
With twenty-twenty hindsight we can now see that investment returns in the year 2020 were as much driven by the companies you were not invested in as those selected. It was a year where active management to help protect capital during the strong downward swings added considerable value. The ability to then reengage by moving to overweight exposure to the more favoured sectors of the ‘stay at home economy’ drove very strong performances.
I suspect that 2021 may require the same level of active management and may be a year that favours an active approach once again.
Have a plan. It probably won’t come as a surprise to anyone that I am a strong advocate of the planning process. For retired clients, the cashflow modelling part of the plan enables them to see the sustainability of regular future drawings.
When we see periods of excess return, as we have just experienced, it is often a prompt to bring forward intermittent expenditure such as house maintenance or vehicle replacement. A plan provides the confidence to make such withdrawals in the knowledge that it is unlikely to compromise future drawings.
I am sure that in 2021 investment markets will be volatile at times; delays in the global distribution of vaccines and questions about the emergence of new strains of the virus will no doubt have an impact.
However, I am confident that a well-structured, properly diversified and managed portfolio will continue to provide the best protection of wealth in an uncertain world.
This document has been provided for information purposes only. The content of this document is not intended as a substitute for specific professional advice on investments, financial planning or any other matter.
While the information provided in this document is stated accurately to the best of our knowledge and belief, New Zealand Funds Management Limited, its directors, employees and related parties accept no liability or responsibility for any loss, damage, claim or expense suffered or incurred by any party as a result of reliance on the information provided and opinions expressed except as required by law.
While the information provided in this document is stated accurately to the best of our knowledge and belief, New Zealand Funds Management Limited, its directors, employees and related parties accept no liability or responsibility for any loss, damage, claim or expense suffered or incurred by any party as a result of reliance on the information provided and opinions expressed except as required by law.
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Peter Ashworth is a Principal of New Zealand Funds Management Limited, and a Financial Adviser based in Dunedin. The opinions expressed in this column are his own and not necessarily those of NZ Funds. His disclosure statements are available on request and free of charge.
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First published in the Otago Daily Times on 15 February 2021, as 'Is 2021 a hangover year for investments?'.
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