I recently had a call from a worried parent whose child had investment funds held in trust for them as the child was too young to own them in her own name. The mother was concerned that COVID-19 was a complete game changer and that we had never lived through anything like it before.
You may think that this is a fair point, and understandably so. However, whilst most of us were not alive, the stock markets have experienced pandemics before. For example, Spanish ‘flu arrived on the scene late in the First World War and rampaged throughout 1918 and 1919. What followed were the “Roaring Twenties” and not financial meltdown. Clearly, no adviser can guarantee that investments will rise over any particular period, but the truth is that, given a sensible timeframe, we can be reasonably confident of success. Indeed, there is now software available that can give a probability of success based upon how the investments are allocated. By that I mean how much is invested in various stock markets, fixed income and cash. This is referred to as “Asset Allocation” and is very important, perhaps the most important determinant of results. If you are looking at a 20-year investment period, for example, the software will take each 20-year period since 1900. In other words, 1st January 1900 to 31st December 1919, then 1st February to 31st January 1920 and so on all the way up to 2021. It can give the chances of differing asset allocations reaching a specific target. This is particularly useful in the pensions arena where someone has a target income they want or need in retirement. The question is “If I have X in the pot now and I am saving Y each month, what are the chances on taking an income of Z from age 60?” It may well tell us that an investment approach that is too cautious only has 60% chance of success, but a different approach has a 99% chance (never 100%, just in case). The client can then agree to take more “risk” in his investments to achieve his target or carry greater risk of not achieving his desired income. I know which I would choose. This is one of the areas where a competent financial adviser can add genuine value to an investor and client. This is especially true if the adviser is independent rather than representing one company or tied to a small number of providers. Rutherford Hughes Limited is proudly independent.
