No one starts out with a map of their life, which makes it hard to sketch an enduring investment strategy. However, asking three fundamental questions can see you through investing for life.
Even if the ideal is to enjoy the fruits of your investments as you go, investment is the work of a lifetime. Inevitably, that means changing your strategy at key life stages – some predictable, some not.
Planning for these phases can be daunting. It seems perverse to build in a divorce settlement while celebrating your wedding, for example, while no one likes to consider future illness or disability. And for the next generation, it’s a leap of belief to imagine you will age, let alone retire.
But it isn’t essential to map out a whole-life strategy to ensure your investments continue to meet your needs, according to Jonathan Sparks, Chief Investment Officer, UK and CI at HSBC Private Banking UK.
“It’s obviously useful to have an awareness of investment strategies at an early stage. But to an extent, you don’t really need to plan, or to forecast how your approach will change in the future,” he says. “What you do need to do is regularly consider whether your approach is still right for your circumstances, and make those decisions as and when they arise.”
He suggests investors reflect on three key questions.
1. What’s your approach to risk and return?
One of the most obvious investment questions has taken on extra pertinence with the recent rise in inflation after years of historic lows. In response, some investors are turning to index-linked bonds, which offer a secure hedge – although in practice their real yield over time is negative.
This is of less concern to the younger generation, who are typically bolder in their choices than their elders – and with good reason, says Jonathan. One of the advantages of youth is a long time horizon to await returns from riskier investments. That allows for investments linked to powerful ‘megatrends’ that are creating structural shifts in society.
With time on your side, a portfolio weighted towards, say, speculative renewable technologies makes sense: “With a longer horizon, younger investors have more options because they don’t need to worry about keeping up with inflation in real time,” says Jonathan.
Real estate is another relatively sound investment option for relatively young investors, he adds: “If inflation goes up negative to interest rates, that might hurt equities and even the value of some property. Over time, however, you should be able to lift rents in line with inflation. It might not be the perfect hedge, but inflation will be absorbed, as long as you can play a longer-term game.”
For later life stages – for example, raising a family, and paying for school fees and university tuition – it can be valuable to have some safe, shorter-term investments in your portfolio. “Corporate bonds or money market funds inevitably offer lower returns, but they provide the liquidity that can be critical if you’re likely to need ready cash,” Jonathan says.
With dependants in your life, and perhaps a more realistic view of human vulnerability and mortality, you might also decide it’s time to build insurance solutions into your wealth management strategy.
2. Do you have the optimum diversity in your portfolio?
Jonathan emphasises the value of spreading investments across different themes, asset classes and geographies. He advises thinking beyond the portfolio itself and across your whole financial life.
He gives the examples of a traditional shopkeeper who made an early investment in shares in an ecommerce platform, or a traditional banker who has shares in a fintech. “If your career is in making the next hydrogen car, maybe you don’t want to put all your eggs into a climate change pure play,” he suggests.
3. What do you want to leave behind?
Peace of mind about provision for your loved ones is a concern that naturally looms larger with age. This is one area where advanced planning is highly advisable.
Where the handover of a business is involved, it’s critical that everyone in the family has clarity about your intentions. And for estate purposes, you may decide to set up trusts or consolidate family wealth in pooled structures, to ensure protection of your funds in the most tax-efficient way.
There is also the question of what you leave behind beyond your immediate circle: that is, your legacy to the wider world. Again, for some investors, that’s an ambition that formulates in later years, but for many, particularly younger investors, it’s something that features in both short-term and long-term strategies. Impact investing can be employed across a portfolio to fulfil social and financial purposes.
“Any investor who wants to have a positive effect – for example, by raising the standard of education in a certain part of the world – could achieve that through impact investing,” says Jonathan. “However, an ambition to open a Rothko gallery, for instance, would be a long-term aspiration that would change your approach from the outset.
“It can be instructive to ask yourself not just what’s the highest risk return you can accept given your age, but what kind of footprint do you want to make on the planet? You then need to tailor your strategy accordingly.”
Of course, ambitions change in the same way as life circumstances, so it’s important to keep reconsidering these questions and revisiting your portfolio in light of the answers. “A regular review and rebalancing every six to twelve months is critical to keep your investments in step with your life,” Jonathan concludes.
It can be instructive to ask yourself not just what’s the highest risk return you can accept given your age, but what kind of footprint do you want to make on the planet? You then need to tailor your strategy accordingly.