Harvey Jones

Portfolio planning isn't what it used to be. It’s time to adjust

We live in unprecedented times, and that applies to investors as well. The financial crisis and Covid-19 pandemic have radically transformed many portfolio planning assumptions.
Since 2008, interest rates have hit rock bottom while stock markets have skyrocketed. Cash is no longer king. Bonds trade on negative yields. Gold has shone (until recently). Bitcoin has flown, crashed, flown again.
Wise investors still spread their money across shares, cash, bonds, property, gold and commodities, but the balance has shifted and you might want to reconsider your asset allocation.
Here are five changes to consider.

The death of annuities

Traditionally, investors reduced their exposure to risk as retirement loomed, shifting out of shares and into cash and bonds to protect against a last-minute stock market crash. Then they would buy an annuity, to secure a guaranteed income for life.
With interest rates close to zero, annuities sales have collapsed. Most investors now keep their money invested throughout retirement, to benefit from stock market growth, while drawing income as required.
As life expectancy rises, this makes sense. Nobody wants to lock themselves out of share price growth for a retirement that could last 25 or 30 years.
By staying invested, it is also easier to pass on your wealth to younger family members when you die.
Annuities are dead, long live shares.

The decline of trust

There has been a cultural change, as well. Trust in governments has declined. Investors are sceptical about fiat currencies, as central bankers and politicians pump out trillions of dollars in support to keep the economy afloat.
In the US, Covid stimulus now totals almost 27% of the country’s gross domestic product, an incredible sum. Other countries have gone even further. In Germany, the figure is 36%. In Japan, almost 55%.
This comes on top of all the stimulus pumped out after the financial crisis. Many fear this will unleash inflation, once consumers are liberated from lockdown and can splurge their pent-up savings.
Gold and hard commodities are traditional inflation hedges. Mining stocks have been the best performing asset class of the last year, as investors prepare for growth.
Yet despite the inflation threat, the gold price has fallen. There is a new factor at play here.
The rise of crypto.

The crypto revolution

At the start of last year, few investment planners were recommending Bitcoin as part of a balanced portfolio.
It looked like a busted flush, peaking at $20,000 in December 2017, then crashing.
Bitcoin is now back, shooting past $63,000 in April. That lifted its market cap beyond $1 trillion. It hit that landmark figure faster than tech titans Amazon, Apple and Google.
Bitcoin has gained new respectability, as institutional investors get involved, and Tesla, PayPal and MasterCard look to support crypto transactions.
It remains hugely volatile (dropping 25% from its April peak), but is here to say.
Some see Bitcoin as a store of value, but I think it’s different to gold. It’s a risk-on asset class, that rises when investors are feeling bullish.
Rather like shares.
I still think it has a place in a balanced portfolio. Although I wouldn’t put more than 5% of my wealth into it. Okay maybe 10%.
Crypto is a new and unregulated asset class, vulnerable to hype, distortion, ramping, extreme volatility and government clampdowns, with no redress if you lose money.
It sure ain’t gold.
Which is also doing strange things.

The volatility of gold

Gold is supposed to be non-correlated with stock markets, so when share prices rise, gold falls, and vice versa.
Investors hold it as downside protection. Last August, gold hit an all-time high of $2,084 an ounce. Since then it has been all downhill. It now trades at around $1,780.
his is strange, given fiat currency debasement, so what’s happening?
One factor is that private and institutional investors have been selling some of their gold holdings, and buying crypto. Others are simply betting that vaccines will give the global economy a much-needed shot in the arm.
I would still hold around 5% of my portfolio in gold. It continues to offer protection against monetary and fiscal splurge, and is a counterbalance to the Bitcoin frenzy.
The precious metal has shone this millennium, rising 544% in the last 20 years.
This year’s 15% price drop could even be a buying opportunity.

Bonds suddenly look risky

Bonds have been a cornerstone of portfolio planning for decades, but less so now. When I started out as a financial journalist 30 years ago, advisers said the percentage of bonds in your portfolio should match your age.
So at age 40, you should have 40% in bonds, rising to 70% at age 70.
Nobody would recommend that today, with $17 trillion worth of global bonds trading on negative yields.
If inflation returns, bonds will look even less appealing as they pay a fixed rate of interest.
There is also the danger of capital loss. Many bond ETFs have fallen around 10% year-to-date, on inflation fears.
As one wit put it, bonds now offer “return-free risk rather than risk-free return”.
This doesn’t mean you should abandon bonds. Older, lower-risk investors will still want exposure. Just less than before.

It still pays to keep your balance

One thing hasn't changed. The future is unknowable. We do not know which asset classes will climb in future, and which will fall.
That means building a balanced portfolio is as important as it ever, even if it now looks slightly different.
Shares will still make up the bulk of most people’s portfolios, although I’m wary of today’s inflated prices.
The single best way to hedge against risk is to invest for the long term, as the next few years could be bumpy.
Aren’t they always?


Harvey Jones has been a UK financial journalist for more than 30 years, writing regularly for a host of UK titles including The Times, Sunday Times, The Independent and Financial Times. He is currently the personal finance editor of the Daily Express and Sunday Express, and writes regularly for The Observer and Guardian Unlimited, Motley Fool and Reader’s Digest.


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Please note the value of investments can go down as well as up, and you may not get back all the money that you invest. Past performance is no guarantee of future results.

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