Whether you want to spread your risk
Let us look at four scenarios where you have your money in shares in:
- a single company,
- Many companies in the same industry in the same country,
- Many companies in many industries in the same country or,
- Many companies in many industries in many countries around the world.
In each scenario think about what the effect of a single company failing could have on your financial plan. What about an industry? A country’s economy? Which scenario spreads risk best?
Which scenario depends least on your ability to pick the right companies?
How you react to falls in the value of your portfolio
If your portfolio goes down in value how do you feel? How does that affect your decisions? If you look at the performance of the FTSE 100 in the UK, S&P 500 in the US or the NIKKEI in Japan has every day been positive? What about over 12 months? Five years? 10 years?
Does your financial plan depend on the performance of your portfolio over a day or many many years? How does this affect how you think about how your portfolio performs?
A basket of global shares may be less susceptible to more specific risks but its value will go up and down over time. Currently, such a portfolio could have fallen by up to a third but in 2008/2009 it could have fallen by more than half. It recovered and went on to deliver tremendous returns to investors, but this took time. Have you looked at any of the tests available to assess how market falls could affect your ability to give a portfolio the time it needs to recover?
What about including other assets such as loans to governments and corporations? Their values tend not to rise and fall as much as shares so could they help?
If over the shorter term you might take money out of your portfolio what assets would you prefer to call upon? Shares, which could have fallen and need time to recover or those assets which may not have fall so much? To what degree should this affect your portfolio?
The number of decisions you have to make about your portfolio
How does having to make decisions about your portfolio affect how well you can take a long-term view? What could you do about the number of decisions you have to make about your portfolio?
To what degree could you delegate or even automate decisions? How in control do you need to be of your portfolio for your financial plan to succeed?
