Why you should invest more of your money in equities

Apr 24, 2019 | Tony Byrne's View

As most readers of my blogs are our clients they will be aware that we operate a system of asset allocation, or diversification of risk, by investing our clients’ money across the 4 main asset classes of equities, bonds, property and cash and reviewing it regularly.  This is known as modern portfolio theory which was invented by a Professor Harry Markowitz. It is essentially a strategy of not keeping all of your eggs in one basket.

How much we invest in each asset class is determined by our clients’ attitude to investment risk and their capacity for loss.  The higher the level of risk the more is invested into equities and vice versa.

On the subject of equities, they recently suffered a large fall in world stock markets in the last quarter of 2018 when markets fell in value between 10%- 15%.   Whilst stock markets will always rise and fall in value the long term trend is upwards of course. In the US share prices, including dividends reinvested, have risen by an average of 6.7% a year over the last 200, 100, 50 and 25 years.  The return from equities far exceeded the returns from cash and fixed interest. So why should it be any different over the next 100 years?

I lost touch with a client for 20 years then resumed our relationship about 5 years ago.  He and his wife had kept all of the equity unit trusts I had recommended to them originally.  I was staggered to find that many of them had risen by 300%- 400% over 20 years with no annual reviews.  

Clients know instinctively that it makes much more sense to simply invest 100% into equities if the investment term is say 10 years or more.  Clearly, there would need to be a range of funds in order to reduce risk. Unfortunately, it would require the client to be a very high risk investor and to have sufficient capacity for loss to adopt such a strategy under current rules, but at least it would be likely to far exceed returns from any other approach.

However, in my experience, clients do not like the volatility of shares, which is why most of them are risk grades 4- 6 out of 10, with 10 being the highest level of risk.  At these levels of risk you are only likely to have between 50%- 60% invested in shares. Therefore when stock markets fall clients’ funds do not fall in value as much and when stock markets rise clients’ funds do not rise in value as much.

So what can you do about it?  Firstly, you can increase your attitude to investment risk, which will mean you invest more into shares. Secondly, you can invest 20% of your existing funds into our sister company Minerva Money Management’s, CCM Intelligent Wealth Fund, which is a 100% equities fund.  Both tactics will increase your exposure to equities which will be no bad thing in the long term.

So if you are interested in investing your money better why not get in touch with us?  You know it makes sense.

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