Investment Clock insights

How can investors approach 2018?


Nersen Pillay

21 December 2017

Can investors simply keep the investments they have had and expect the returns of the last five years to be repeated in the next five?  Clearly, starting points in the economy and in markets matter;  it becomes harder to generate high returns when starting from higher levels. Furthermore, markets may be supported by current growth and inflation levels but the global economy is not static and many factors can complicate the environment. There is always a degree of uncertainty as we start a new year. Will China slow down?  Will inflation surprise on the upside? Which asset classes should investors choose?

So, given where we are starting from in markets, how can investors approach 2018?   We think not putting all your eggs in one basket makes sense.


Source: Expected risk and return based on RLAM’s medium term capital market assumption as of December 2017. *Please note that this does not reflect the actual performance of the RL Funds and should be used for information purposes only, not as a reliable indicator of future performance.

The chart above shows the benefits of diversification in terms of risk and return for different asset allocation benchmarks.

A conservative investor may want to get better returns than inflation (to maintain the real purchasing power of their assets) while not taking too much risk. We estimate that a cautious strategy holding mostly bonds and cash (see the orange oval on the left) has an expected return of less than 1% with expected risk of around 4% per annum. By diversifying with a multi asset fund holding 25% of its assets in equities, property and commodities, superior expected returns can be achieved and with very little increase in volatility. Diversification and flexible tactical asset allocation can deliver a better risk-return trade off than a pure bond fund for the conservative investor.

For an investor wanting growth, a pure equity portfolio would be expected to generate returns of around 7% p.a. with historic risk of around 17%, according to our data. By diversifying, say allocating 10% to 25% to Store of Value assets, savers wanting growth could potentially get equity-like returns but with far lower expected volatility i.e. with less risk in any equity market correction.

The power of diversification can play an important role in reducing risk while still getting good long-term returns. In addition, tactical asset allocation can quickly take advantage of market movements to improve long-term returns and lower risk in portfolios.

The Royal London Global Multi Asset Portfolios (GMAPs), a range of risk rated funds, aim to offer diversification across the risk return spectrum.

 

Past performance is not a guide to future performance. The value of investments and the income from them is not guaranteed and may go down as well as up and investors may not get back the amount originally invested. The views expressed are the author’s own and do not constitute investment advice.