2017 was another positive year for investors, particularly those with a high degree of exposure to global equities in their portfolios, which is why it may be an opportune time for them to review their Risk, Equity Exposure, Costs, Asset Allocation and Performance.
Many people have assets in different places, predominantly in either portfolios managed personally or in discretionary portfolios managed by professional fund managers, as well as in pension schemes. Accordingly, any analysis needs to be holistic, in order for the conclusions to be meaningful and worthwhile.
As we move into a new year, now is the perfect time for investors to re-assess their investment goals and look closely at the key considerations which will determine their investment outcome in 2018, rather than leave it completely to chance.
Risk
The higher the level of risk taken, the greater the potential gains or losses which may occur as a result. 2017 has been a classic year from a risk/reward perspective with the highest returns being achieved by Emerging Market equities, which tend to exhibit riskier and more volatile traits than those in developed markets, and the lowest emanating from cash, which is generally perceived as being risk-free.
Although it is possible to calculate risk mathematically, the measures used are generated from historical data and can therefore only act as a theoretical guide to future returns. However, it is important for investors to keep their appetite for risk under review, in order to ensure that it is consistent with their investment objectives, which inevitably change over time.
Equity Exposure
One of the most important decisions in investment management is how much to invest in equities versus bonds and cash, and this is inextricably linked to the individual’s risk tolerance. A low-risk portfolio is one which holds a small percentage in equities and a large weighting in cash, whilst a high-risk approach might be one which involves “gearing” , that is, borrowing money to invest in equities, with all the associated upside potential and downside risks. Future returns, both positive and negative, will be determined largely by the degree of exposure to equities, so striking the right balance is of critical importance and should take into account the prevailing macroeconomic background and stock market valuations, as well as the investor’s goals.
Costs
Investors should be cognizant of fees and charges, which can significantly erode the value of portfolios in the long term. For example, if the value of a £1,000,000 portfolio with no fees attached grows at a compound rate of 5% per annum over a period of 20 years, it would be worth almost £500,000 more than a portfolio achieving the same investment return, whilst incurring a relatively modest annual fee, by industry standards, of 1%, even before taking into account VAT.
Asset Allocation
Deciding on how to much money to allocate to different stock markets or other asset classes, such as commodities or property, as well as bonds and cash, together with the associated currency implications, will have a material effect on returns. For example, the US has been one of the most rewarding markets in which to invest over the past five years and the portfolio weighting in this market would have been a key driver of performance, further enhanced by the strength of the dollar.
Performance
Whilst 2017 was a very rewarding year for equity investors, and absolute returns were relatively easy to achieve, the question which they should now be asking is whether the returns generated were consistent with their risk parameters and also how their portfolios have performed relative to market indices, as well as industry benchmarks.

The above summary has only touched upon a few areas on which, in my opinion, investors should be focusing at this time. It is easy to become complacent when markets have been performing well and assume that the good times will keep on rolling, but it was arguably a similar story at the end of 1999 (when, incidentally, the FTSE 100 Index also hit an all-time closing high of 6,930, compared to the record closing high of 7688 on 29th December, 2017) and 2007, so perhaps it really is time for a RECAP.
If you would like some help with the above exercise, Andrew may be able to assist you.

For a consultation with Andrew Bretell, click here