I am becoming increasingly concerned with my investment portfolio. I started this three years ago and have seen declines in the portfolio value each year since I started it. I am invested entirely in equities, spread across Europe, the US and Asia. Should I be selling out of these equity funds for a safer haven of cash or bonds?
Firstly, I hope you are not entirely invested in equities as you mention. Investing in any form must be for the medium to long-term and one must never tie up all your capital. Instead a sensible amount must always be kept liquid, i.e. on short-term deposit to meet any unforeseen emergencies. I generally recommend a minimum of one year's income to act as an emergency fund but individual circumstances will of course differ.
On investing three years ago, you did so at the peak of equity markets. During the late 1990s, equities soared and double-digit returns were the norm. This was of course due in the main to the telecom and technology boom. Since then, the bubble has well and truly burst and equity prices are returning to more realistic levels. This does however mean that significant losses have been made in most equity sectors over the last three years. Europe, the US and Asia have all lost ground over the period.
The decision of whether to sell or hold is a difficult one and a decision that cannot be taken in isolation. Rather than ask 'should I sell?', I feel a more appropriate approach is that of reviewing and rebalancing your portfolio against your medium and long-term investment needs.
Typically I would recommend a portfolio be weighted 65% equities, 30% fixed-interest (bonds) and 5% cash. This weighting will generally produce the best prospects for capital growth over the longer term and at the same time have adequate diversification. However, if you require immediate income from your portfolio then you should reduce your equity exposure and increase your fixed interest weighting.
Far too often investors leave their portfolios invested for long periods without rebalancing the asset allocation. This is very dangerous as opportunities are missed and at the same time, investors are currently left too heavily invested in equities in light of the current global economic problems.
The direct answer to your question is to establish whether you still have a long-term investment horizon, whether you are looking to draw any income from the portfolio in the coming 12-24 months and whether your attitude to risk has changed at all over the last three years. If your view has changed in any way then yes, you must rebalance your equity portfolio.
Please address any financial questions to: Mark Hollingsworth, c/o The Sunday Times, PO Box 328, Valletta CMR01. Alternatively, he can be contacted on 2131-1121/9984-2614 (office hours).
Past performance is no guide to the future and except where amounts are guaranteed the price of your investments (and the currency in which it is denominated) may fall as well as rise. Malta Exchange Control Regulations must be observed. Your personal tax situation will depend upon residence, always consult a professional adviser. This article does not intend to give investment advice and the contents therin should not be construed as such. Readers are encouraged to seek professional advice regarding their personal financial situation.