3 Mins
Our newsletters this year concentrated on the challenges investment portfolios have faced. From the war in Ukraine, economic uncertainty, rising inflation, rising interest rates, and the cost of living crisis, it’s certainly been a tough year.
Understanding why your investments have suffered is one thing. However, dealing with your feelings about your portfolio value dropping can be a different experience. We stand by our message to investors, and it’s a clear one.
When market conditions are volatile, focus on your original reasons and objectives for your investments. Whether you invested for long term capital growth or were planning for retirement, as examples. When you initially invested, you would have had discussions about the potential ups and downs in investment values over time, and this being part of the investment journey.
Our last newsletter commented on the “mini budget” and how this had a significant impact on most investments but on Fixed Interest Securities in particular (that is, bonds issued by governments and companies). These tend to be the predominant asset held in lower risk portfolios, so why was there such an impact in this area of investment?
There can be several reasons for an investor to take on less risk, and one of the primary reasons risk-averse clients are often placed in lower risk strategies is they don’t have the appetite to ‘stomach’ market falls, so naturally, the mini-budget crisis triggered concerns.
The lower risk portfolios we recommend are highly diversified across Equities, Property, Fixed Interest Securities, Cash, and a variety of other assets. The lower risk of the portfolio, the less will be held in Equities, and a higher amount invested in Fixed Interest Securities, for example. Historically, Fixed Interest Securities would be viewed as lower risk providing less volatile performance than Equities.
Converse to what we would normally expect, in the past 12 months we have witnessed lower risk portfolios being hit the hardest by the market conditions of 2022. Those who adopted this strategy are likely wondering why the investment over the past year has dropped in value more than would be expected for being lower risk.
Rising inflation and interest rates mean the rates of return provided by Fixed Interest Securities were then deemed less attractive by the market and caused these assets to be sold. Therefore their values fell as investors were then able to buy into another bond, paying a higher rate of interest.
The mini-budget also caused havoc for UK Government Bond (Gilts) values and created uncertainty over the financial stability of the UK to repay their debts.
So the impact on Fixed Interest Security prices across the market has been significant and unfortunately has impacted lower risk portfolios. The upside of the position now is that these assets can be bought more cheaply and offer higher rates of interest. So longer term this will be of benefit to portfolios.
Since the “mini-budget” we have thankfully experienced small steps to recovery in Fixed Interest Securities and overall investment values, and you will have experienced this in your portfolio, making up for some of the falls suffered. To illustrate this, we have highlighted the recovery in values of our typical Low and Low to Medium risk portfolios, over the last 3 months, exhibiting gains of 3.85% and 3.67% respectively over this short period.
Of course, we can’t guarantee this, and there may still be some challenging times ahead. However, history would show us that when we have suffered poor market periods, values can recover. It is therefore important to remain invested throughout times like this. We believe in taking a longer-term view with investments and that, with patience, there will be positive times ahead.
On a final note, the team at Henderson Loggie Financial Planning wish you all a Merry Christmas and a happy and healthy 2023.
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Henderson Loggie Financial Planning Ltd is authorised and regulated by the Financial Conduct Authority.
Past performance is not indicative of future results and no representation is made that results where stated, will be replicated. Investment values rise and fall and the value of them is not guaranteed. On encashment, you may not get back the amount invested.