This content is for information and inspiration purposes only. It should not be taken as financial advice or investment advice. To receive tailored, regulated advice regarding your investments and financial goals, please consult an independent financial adviser here at Suttons IFA in Sale, Manchester or wider Cheshire area.
As financial planners here in Cheshire with many different types of clients, it’s important to state that there is no universal answer to this question. Everyone’s financial needs, challenges and goals will be different, as will their risk profile. These and other factors play a key role in deciding how an investment portfolio should be constructed, as well as if/how stocks should feature.
With that said, stocks do tend to play an important role even in a conservative portfolio. This article explains some of their benefits, and how they might feature alongside other assets such as fixed-income securities (e.g. government bonds, or “gilts”).
If you would like to speak with us about your own financial plan or your investment strategy, particularly during this period of heightened volatility, please contact your adviser or feel free to contact us via the main office contacts which will now be directed to a member of the team to help you:
T: 0161 969 1703
E: [email protected]
Why Stocks Tend to be Prominent
A stock investment usually refers to your investment in company shares. In return for your investment, you become a shareholder and receive a share of the ongoing profits paid out as dividends and benefit from the expected capital gain as the share price increases over time.
One of the reasons financial advisers can recommend stocks to clients who want to build wealth is due to their growth potential. Whilst generalisations are difficult due to the vast differences within and across asset types, it is accepted that stocks, overall, have the greatest growth potential in comparison to the other asset classes.
However, with the potential for higher returns also tends to come with higher investment risk. If a company fails, for instance, shareholders rank behind creditors (lenders) for payment in the event a company should suffer financial difficulty. The value of stocks will move up and down on a daily basis as traders and investors digest daily newsflows and company reporting and make their assessments on these may affect their investments and risk position. This means it possible for your stock investments to go up or down in value and there is the risk that you might not get back what you originally invested.
To mitigate this, financial planners such as ours in Sale will almost always recommend diversifying your portfolio. Diversification is the one free lunch in investing, and yet so many investors turn it down. By diversifying broadly across different asset classes, economic sectors and regions of the world, you avoid the risk of a catastrophic fall in the value of your portfolio that comes with being too heavily concentrated in one particular area.
Too Many, or Too Little?
Which stocks should you pick? After all, not all companies have the same resilience during market shocks or economic decline, and different businesses possess varying growth potential. Here, a financial planner can come in especially useful. Not only can an experienced adviser help you to avoid stocks and funds which have shaky fundamentals, but they can also help you to ensure maximum returns by avoiding excessive management fees.
Another key question, however, concerns how much of your portfolio should consist of stocks. This will be different for everyone depending on a range of factors. Here in Sale, we have clients and are some years off their retirement and able to stomach greater volatility as they build up their savings for the future. On the other hand, we have clients who have built up a strong pot for their retirement and want to preserve their investments and / or maintain their income so they can support a comfortable, risk-minimised retirement.
Those in the former group are more likely to accept a higher percentage of stocks in their overall portfolio compared to the latter. After all, if the markets go down at any point throughout the investment period, there are still many years of investing ahead to recover and build on any losses. The latter group, on the other hand, are likely to prefer more stability within their portfolio, with a balance of stocks and fixed-income investments such as cash or bonds preferred.
Regardless of the case, however, it will still be important to diversify your portfolio so that you are not overly-reliant upon too few stocks, funds and asset classes.
It is also always a good idea to bend the ear of an experienced financial professional to ensure you are focusing on quality investments, regardless of the asset type in question. You should also ensure that you have a good understanding of the investment(s) you are considering, before committing them to your portfolio. Finally, be careful not to diversify too thinly or inadequately. Putting too much of your money into a small set of investments might expose your portfolio to too much investment risk; however, spreading everything out too much can carry the risk of inhibiting the growth potential of your wealth.
If you would like to know more about investment strategy or wish to discuss your own financial goals and strategy with us, then we’d be delighted to hear from you.
Please get in touch with your adviser or by using the details below, to arrange a free, no-commitment financial consultation with a member of our team:
T: 0161 969 1703
E: [email protected]