We live in uncertain times, from Brexit and Europe, to the US and China. And that doesn’t really look like changing. But that shouldn’t stop us from investing, otherwise our cash holdings will be eroded by inflation.
So what should we do?
Well, to help reduce our investment risk we need to diversify, not just the asset classes we invest in, but also the geographies that we invest in too. This means investing in stocks, bonds, and commodities, and looking beyond the UK, to the rest of the world.
I’d start by looking at index trackers for the major stock markets. As a general rule, I prefer to invest in an index over a single company, due to the lower risk profile.
Firstly, I’d buy a world index tracker that essentially mirrors the performance of the major world indices. You can’t beat this for diversification. It’s basically a bet that over the long term, the world economy will grow and become more prosperous. Historically, that’s been a pretty good bet.
In terms of developed markets, I quite like the look of the UK and Japan. Both stock markets are cheap. The FTSE 100 has been shunned by international investors since Brexit, yet the index still boasts some quality international companies, which generate a lot of their earnings abroad and aren’t too exposed to the UK domestic economy.
I can’t ignore the US market, so again I’d buy an index tracker. But the US market is relatively expensive, so I’d take this into account by investing less. The sheer size of the US market and the quality of some of its companies, mean that we can’t overlook it. But I would ignore the rest of Europe for now, as there seem to be some structural issues there.
Next, I would look at investing in emerging market index trackers, covering the likes of China, India, and the rest of Asia. These are the future growth engines of the world economy, and it would be a big surprise if their respective stock markets didn’t kick on.
What about bonds?
I’d invest at least 60% of my portfolio in the above equity index trackers, with bonds making up at least another 20%.
The problem is that bonds are currently expensive – historically – which diminishes their future investment prospects. But they can’t be ignored, as they offer a good hedge against stock performance, and could be poised for more short-term gains. Again, I’d invest in cheap tracker funds and split across multiple geographies.
What about the rest?
The remainder of my portfolio would be split between commodities and individual stocks. In terms of commodities, I like gold and I’m getting tempted by oil. Gold tends to do well in low interest rate environments – like what have now. The oil price simply looks too low. We can either invest in tracker funds, or directly in one of the many oil or gold companies on the London Stock Exchange.
I would finish off by investing in a handful of individual stocks. I’m investing for the long term, and since there is enough diversification and protection in the rest of the portfolio, I can afford to take some risk and make the portfolio a bit more exciting.