Balancing act – building an investment portfolio
Everyone wants to protect what they’ve spent a lifetime working for. When choosing the right type of investment for your portfolio, balance is key. Markets can be volatile, especially in the tense geopolitical climate of today, so hedging some risk by investing in physical gold, which tends to rise when other assets fall, is the best way to protect your hard-earned wealth.
The old cliché about eggs and baskets may be very worn around the edges, but it still rings true for investors looking to safeguard their assets. Building a balanced portfolio of investments is a personal journey that needs to take into account the circumstances of the investor, their risk appetite, and as many facts and figures as possible to make an informed decision.
Although each one is unique, most balanced portfolios include some combination of stocks, bonds, cash and physical assets like property and gold. Each asset class has an overall risk profile, and within each asset class as well, a particular stock or bond or property or commodity type will have a different risk profile too.
Someone approaching retirement will want to reduce their risk so as not to jeopardise assets they wouldn’t be able to replace, while someone with many years of employment ahead of them may be more comfortable taking bigger risks because they have time to rebuild their portfolio if catastrophe struck.
The more diversified your portfolio, the more diversified your risk, from a fall in the stock market, to the erosion of bond values after interest rate rises, or inflation-linked currency devaluation or a decline in property values. To hedge this risk and try to soften the blow if any or all of these value-depleting events happen, a balanced portfolio should include some physical gold. The precious commodity has maintained its value over the centuries, and typically performs inversely to the other asset classes. So while your stocks slide, your gold will rise, mitigating some of the losses depending on the percentage in your portfolio.
Depending on your age and risk profile, a balanced portfolio should include between 5-10% and 10-15% gold. Like any other asset, the value of gold can fluctuate, but over the long term, gold tends to increase in value. Investment firm The Pure Gold Company crunched the numbers and found that gold outperformed all other asset classes in the last decade, despite being known primarily as a “safe haven” investment.
£100,000 invested in gold in 2006 grew to £286k a decade later, far outperforming inflation and all other assets. £100,000 invested in property netted £117,000, under-performing inflation by £13,000. The same £100,000 investment in the FTSE 100 ended 2016 on £167,000 while bonds tracked inflation so provided no gain in absolute value.
Gold’s power as an investment medium is clear, and with global uncertainty continuing on its current trajectory, the outlook for gold continues to be very strong.
There are various ways to gain exposure to gold, including Exchange Traded Funds, which track the underlying price of gold and are traded on the stock exchange, gold mining stocks, or physical gold. Owning physical gold is the most secure and purest form of a hedge against unexpected shocks to the financial system because it involves no counterparty risk, is separate from the banking system, and doesn’t rely on the competent management of a mining company.
Gold is also easily sold if investors want to take advantage of other opportunities. The Pure Gold Company provides all buyers with a certificate of authenticity and a buyback guarantee which means clients can liquidate their gold as soon as they’re ready. The company sells the gold investment immediately to lock in live prices, and returns the funds within 12 working hours.
There are a huge range of stocks in which to invest, and they all come with different valuations, outlooks and risk profiles. A small-cap stock that promises grand prospects comes with substantial risk if the company fails, but may also hold the promise of substantial gains on inexpensive entry prices if they hit the big time. A large, diversified company offers stability and lower risk of failure, but could never achieve the growth of a nimble startup, so an investor needs to be content with incremental increases, and hopefully a dividend.
The quantity and diversity of stocks even just on the London Stock Exchange makes researching and selecting investments a long and complex task. Many people choose to invest in a pooled investment fund, which spreads the risk and garners the expertise of a fund manager who will choose which stocks to buy or sell within the fund.
A bond is a loan made to a company or government for a fixed period and paying a variable or fixed rate of interest on the loan. Many of them are traded on public exchanges and are easily accessed by private investors. They pay rates of interest that reflect the period the bond is held, the current interest rate and the level of risk of default of the corporation or government. Many investors use bonds to lower their portfolio risk, choosing to buy government bonds or bonds from large and stable corporations to avoid the risk of default.
The returns tend to be modest, and there are still risks associated even with these relatively safe bonds. For example inflation may erode the value of your returns if it rises above the interest level, and the risk of a decline in the bond market which could mean making a loss if you have to sell before the bond matures.
There are also highly risky bonds issued by companies or governments that are less stable and more likely to default. These pay better interest but you risk losing some or all of your investment they are unable to make payments.
It may seem anomalous to suggest holding cash when other investment options pay dividends or at least have the prospect of increasing in value. But there are good reasons to hold onto some cash in your portfolio, not least because it can be used opportunistically to buy other assets when the price is right. It’s true you have to weigh up the potential for inflation to erode some of its value, but it also doesn’t run the risk of a stock market rout or property crash.
In the UK, the government has guaranteed bank deposits to the value of £85,000 per person in any institution, and so long as you remain within those parameters then even the systemic risk is eliminated.
For a property to be part of an asset portfolio it needs to be earning an income and be available for sale when you decide to liquidate the asset. This is usually an investment property that is rented out for a return, and subject to capital gains tax on its sale.
Property is a long-term investment. It’s not easy to liquidate (selling can take up to a year or more), and there are costs incurred when selling that makes a quick turnaround very difficult. But in the long-term, while property prices may dip and rise, in general values have increased, and if you can earn a rental return that covers your costs, then it is useful part of a balance portfolio.
There are many alternatives to the most common investments in a balanced portfolio. They are often less popular with retail investors because they require a large initial capital investment or more specialist knowledge. Still, if you have enough risk appetite and funds, private equity, hedge funds or venture capital investments can also become part of a balanced portfolio. If you have time to learn about the nuances of fine wine, vintage cars, art or jewellery, there is a thriving market for the finer things in life.