Since the stock market crash I keep reading recommendations for defensive and balanced funds – but surely it’s too late for that?
Since the stock market crash I keep reading recommendations for switching into cash and various sorts of defensive or balanced funds. But surely it’s too late for that?
If I switch my portfolio towards these now I’m just crystallizing losses and missing out on any bull market recovery. Even investing new money, choosing these funds reflects a belief that the stock market is done-for, or that structurally volatility is here to stay, doesn’t it?
Because if you still think the market will rise over the next 10 years, then you should be investing in funds that will take advantage of that?
Is switching into defensive now a case of closing the stable door after the horse has bolted?
Chartered wealth manager Adrian Lowcock, Head of Personal Investing at Willis Owen, says: Switching to a more balanced strategy now does mean you are possibly locking in some losses and could mean you don’t participate as fully in any stock market recovery.
However, that requires you to know that this market sell-off has been completed and the market doesn’t have any further to fall. It is very hard to predict market movements in the short term.
As such a balanced approach would help protect from further falls in the stockmarket. This would mean that if the stock market falls the value of your investments don’t fall as much and you or the fund manager could sell some of the investments that have performed well and reinvest the money back into the stock market at the lower levels.
This diversification helps reduce volatility in the value of your investments as well as protecting capital. It is much easier to grow your portfolio if you haven’t lost 30 per cent in the first place.
Whilst longer term the stock market has been a good place to invest, it is not always the case and there are no guarantees. Volatility is a constant and significant part of investing and as we have seen market crashes can come at any-time, are not easy to predict and can have a major impact on your wealth in the short term.
‘It is very hard to predict market movements in the short term’
This might not matter if you don’t need the money for 20 years or more, but if you are approaching or in retirement it could permanently impact your income in retirement.
Not everyone is comfortable with taking the same level of risks and the recent market sell-off may be the first time they have experienced the downside of investing in stocks and shares. Such volatility in their investments might mean they don’t sleep well at night and that level of risk just isn’t for them.
A balanced or defensive fund helps reduce that risk to levels they are more comfortable with whilst still giving them some exposure to the opportunities the stock market offers.
If you think that stock markets are going to perform over the next 10 years then you might want to put a lot of your money in there. But you should ask yourself how sure are you, can you guarantee it and how do you know for sure there won’t be another crash?
A balanced approach and defensive funds are a way of spreading the risk and putting some insurance in the portfolio in case you are wrong.
John Betteridge, Chief Investment Officer at Rowan Dartington, says: Investing for growth is not always the right strategy.
After the 15 per cent fall in returns from peak to now in the US as a consequence of the COVID-19 crisis, that may still represent a buying opportunity for some. A passive investor may take the view that the balance of risks over the next ten-years may now lay to the upside and invest in equities accordingly.
Some, however, will not have either the risk appetite nor the capacity for loss to invest all their financial wealth in equities. If that is the case, there should be balanced exposure between growth and more defensive asset classes.
Within that balance, the most appropriate geographical as well as sector exposure to equities is an option to potentially maximise returns subject to constraints.
This may involve splitting a longer-term objective into a series of shorter-term time frames. In periods when uncertainty is high, such as it is now, time frames will shorten with the aim of reducing risk exposure against dynamic market risk.
Extending into equities from here would therefore require an assumption that the worst has passed and that the relief rally is sustainable. Our analysis shows that the rally in the US has few cyclical drivers (aside from tech) and without a broad-based recovery, may not be sustainable.
Some defensive positioning may therefore be required, even within a balanced mandate.