Why your clients shouldn’t sleep on it

Trevor Greetham, manager of Fidelity’s Multi Asset Funds, explains how to convince your clients not to stuff their money under the mattress

Vanishingly low interest rates and volatile stock markets have tested the patience of many investors over the past few years.

But stuffing money under the mattress is not a sensible option, with UK retail price inflation running at its highest level since the early 1990s.

The best response to volatility is to keep long-term objectives firmly in mind and stay true to two simple principles a generation of investors may have forgotten over the long equity bull market of the 1980s and 1990s.

First, to diversify across asset classes – with safe haven investments such as gilts and gold negatively correlated with stocks, the smoothing process is working better than ever.

Second, whenever possible diversify over time by splitting lump sums into several chunks or investing through a monthly plan.

Spreading investments out mitigates against the whiplash that can come from investing at the crest of one of the manic swings we have seen recently and payments made in the darkest hours will invariably turn out the most profitable.

When we choose to save or invest in financial assets, we are ­making a conscious decision to defer consumption to a future date.

Some of the things we might want to do with our money are distant and ­discretionary.

Others are short term and all too certain, such as paying off a debt. Understanding objectives, time horizon and the ­consequences of shortfall can help us choose an appropriate asset mix.

Advisers have an essential role in guiding their clients towards a balance between relatively stable “store of value” assets denominated in home currency, such as sterling bonds and deposits, and those that allow participation in the growth of the world economy or give protection against increases in living costs, such as shares and commodities.

Diversification

I often read that diversification is dead. But as a multi-asset ­portfolio manager, I couldn’t disagree more.

There is a mindset that says ­diversification means owning overseas stocks alongside those listed in the UK.

You do get exposure to faster growing parts of the world that way, but the short-term swings in equity prices are, if anything, ­amplified.

For all their attractions, emerging market stocks are ­significantly more volatile than their UK counterparts.

Moreover, the correlation between countries is extremely high due to the synchronised and pronounced global economic cycle we are all experiencing.

But this same entrenched boom-bust cycle is giving rise to low and even negative correlations between asset classes that by their very ­nature behave differently at different stages of the cycle.