If you decide not to pick your own investment funds, then you need to be very careful when it comes to managed portfolio descriptions. 

Most people do not have the time, inclination or skill to pick their own investments whether it be picking individual stocks or funds.  

Instead, there is a whole range of managed portfolios out there whereby a professional investment manager will pick, choose and manage investments on your behalf.  

All you need to do is pick the portfolio that is right for you.  

Sounds easy? The problem is the way different types of managed portfolios are described.  

Unless you understand what these managed portfolio descriptions really mean then you could be seriously out of pocket in the long run. 

 

Different types of managed portfolio descriptions 


I recently heard an advert on the radio for Lloyds Bank. The advert described how Lloyds Bank can help you invest by choosing one of their ready-made investment portfolios. You have the choice of a ‘cautious’, ‘balanced’ or ‘progressive’ portfolio.  

What these managed portfolio descriptions are trying to do is give you an indication of the level of risk involved with each portfolio.  

So, you would assume ‘cautious’ means something will proceed more carefully and therefore investing in something less risky.  

‘Balanced’ sounds like somewhere in the middle, a bit of risk, but not too much.  

Most investment platforms have a similar version of managed portfolio descriptions.  

AJ Bell uses cautious, balanced and adventurous and so does Hargreaves Lansdown.  

This sort of thing really bugs me.  

Using words like ‘cautious’ or ‘balanced’ is very misleading.  

Using these words will secretly sync with your underlying personality traits. So, if you are naturally a cautious person you are understandably going to probably choose a cautious investment portfolio.  

But what kind of risks are we talking about here? 

 

The problem with getting managed portfolio descriptions wrong 


There are lots of different elements of risk 

I think most people when thinking about risk are worried about losing money.  

As long as you invest in a diversified portfolio of funds there is virtually zero chance of a permanent loss. Your money will be spread across thousands of different investments all over the world so even if one or two of these investments went bust each year it would hardly dent your portfolio.  

What these managed portfolio descriptions are trying to tell you is the level of volatility expected with each portfolio. How high and low your investment value might fluctuate. 

So, for a ‘cautious’ portfolio you would expect little volatility and for an ‘adventurous’ portfolio you might expect lots of volatility. 

The first problem here is that volatility and investment returns go hand in hand. You can’t have one without the other.  

If you want low volatility, then you need to accept low returns. The opposite is also true, if you accept high volatility then you should be rewarded with higher returns over the longer term. 

The second problem is that volatility is not the only thing that needs to be considered, the real risk to your investment portfolio over the long term is inflation.  

Based on historical inflation whatever something costs today, it is likely to double in value over the next 10 – 20 years. Therefore, your money needs to keep up with inflation just to maintain its purchasing power.  

Some types of assets like bonds or fixed interest investments have failed to beat inflation over the long term which is the same as saying you would have lost money in real terms.  

A ‘cautious’ managed portfolio is likely to include a high proportion in bonds and other types of investments that have low volatility. So, whilst you may feel you are not taking much risk with a ‘cautious’ portfolio you in fact are. The levels of return you make are unlikely to beat or even match inflation.  

Just because something is labelled ‘cautious’ and expects lower volatility, doesn’t mean it’s guaranteed. Many of these types of portfolios suffered 20% falls in value during Covid and in 2022 following the mini budget. 

Even a ‘balanced’ portfolio is likely to have a 40% – 50% allocation to bonds which in turn means this type of portfolio has also struggled against inflation over the long term.  

The only strategy that is likely to outperform inflation is an ‘adventurous’ portfolio meaning one that contains a high proportion of global equities.  

The third problem is the risk of poor returns leading to you not achieving your financial goals.  

I’m horrified when I see young people choosing a ‘cautious’ portfolio for their long-term wealth building.  

Yes, you might be a cautious person but if you truly understood risk as described above isn’t it riskier to choose a ‘cautious’ portfolio and give yourself less chance of achieving great wealth? 

It’s also the same when you approach retirement. There is a tendency for retirees to become cautious with their money. This is understandable if you have worked hard all your life to build wealth.  

But if your retirement is going to last 20 – 30 years (which it will for most people retiring at 65) then surely it’s a disaster to be in a ‘cautious’ portfolio that is unlikely to beat inflation over the long run? 

You’re automatically destroying your wealth in real terms. 

Don’t get me wrong, us as Financial Advisers have to take blame as well. As regulation has forced us to put people into boxes by asking you to complete risk questionnaires. Asking you a series of questions to determine your risk score.  

These questionnaires inevitably end up with low or middle risk scores because until you understand real risk of course you are going to choose answers that don’t sound as scary. 

So, it’s time we flipped these managed portfolio descriptions on their head. ‘Cautious’ is actually the most risk and ‘adventurous’ will likely be the safest option for most people.  

Of course, you will need to review your own position and you might even question whether you need a managed portfolio at all. For some you might be able to achieve your long-term financial goals in one fund which could save you a huge amount in costs over the long term.  

If you would like to stress test your retirement plans or even to get a plan in place then please get in touch for a free no obligation 15-minute call. We would be happy to review your position, explain where you stand and what you need to do to get the outcome you desire. We have created hundreds of happy and protected retirements over the years. This could be you too.  

Risk warning:

Stock market linked investments and any income from them, can fall as well as rise and is not guaranteed. Any figures quoted are for illustrative purposes and should not be taken as a forecast or guarantee. Past performance should not be seen as an indication of future returns and clients may get back less than they have invested.