Harvey Jones
13.03.2020

It pays to keep your balance when markets crash
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Don't panic. Stay calm. Be cool. As I write this, global stock markets are crashing around our ears, but you can survive the fallout, provided you strike the right balance.

The importance of building a balanced portfolio is a basic investment lesson that too many overlook, as they go chasing the next big thing.

In times like these, it comes into its own. If you have got the balance right, then you can dial down your own personal panic levels, and sit out the crash in relative comfort.

So do not hold all of your invested wealth into stocks and shares, but reduce the risks by putting some of it into cash, bonds and gold.

You can include other investments that take your fancy, whether commodities, crypto-currencies or whatever. Just don’t let your enthusiasm unbalance you. A properly balanced portfolio will reflect your own circumstances, such as how long you plan to remain invested, and your attitude to risk.

Shares

Despite the current trauma, I believe the majority of your long-term invested wealth should go into the stock market. History shows that equities deliver the greatest returns over the longer run, from a combination of share price growth and reinvested dividends.

That's where most of my money is.

If you can screw up your courage, recent share price falls could be an incredible opportunity to top up on bargain stocks or funds at today's lower prices.

The percentage of your portfolio that you hold in shares will partly depend on your age.

The younger you are, the more risk you can afford to take. So at age 25, you could be 100 per cent invested in the stock market, and what a buying opportunity you have today.

As you edge closer to retirement, you should start scaling back your exposure. If you are retired and living off the income from your portfolio, you certainly don't want to be fully invested in shares right now. You'd be having sleepless nights. However, given that your retirement could stretch for 20 or 25 years, you need some stock market exposure to make sure the value of your money keeps growing in real terms.

You should also diversify into non-correlating assets that perform differently to share prices at different times in the market cycle. That should offer some respite today.

Bonds

Government and corporate bonds pay a fixed rate of interest with a return of your capital at a pre-agreed date.

This can help you offset volatility elsewhere, but risk levels vary. For example, high-yield bonds pay more interest, but the companies issuing them can be more vulnerable to collapse, putting your capital at increased risk.

Again, you have to strike a balance, this time between investment-grade bonds and riskier high yield instruments.

An old rule of thumb suggests you should hold bonds in inverse proportion to your age. So at 35, you should hold 35 per cent of your portfolio in bonds, rising to 75 per cent at age 75.

I reckon that is overdoing it, given today’s high prices and low yields, and would have less exposure than that.

At time of writing, a 10-year US Treasury yields just below 1 per cent, and that could fall even lower if the Federal Reserve cuts rates again, as everybody expects.

Most investors buy bond funds investing in a spread of government and corporate debt. Consider low-cost exchange traded funds (ETFs) such as the US-focused USD Treasury Bond UCITS ETF, or spread your risk across different developed countries with the iShares Global Govt Bond UCITS ETF.

Alternatively, Swissquote Smart Portfolios offers investors a range of globally diversified portfolios containing both stocks and bonds, which are regularly rebalanced in line with your original risk profile.

They will do the hard work for you.

Cash

Can you believe people used to say cash is king? It has been dethroned by those upstart central bankers, who slashed interest rates to near zero after the financial crisis, and are now hacking them back again.

Everyone should still have a cash buffer, equivalent to six months of spending money held on instant access, for emergencies.

If you are retired and in pension drawdown, I would stretch that to two years. That way you won’t be forced to sell stocks after markets have fallen, just to meet your everyday living experiences. Doing that will further deplete your portfolio and lock you out of the recovery when it comes.

There is another benefit in holding cash. In means that at times like these, you have some ammunition at your disposal, and can go gunning for stocks or ETFs at bargain prices.

Gold

As Warren Buffett famously said, gold “doesn't do anything but sit there and look at you”. Harsh, but there is some truth in it.

The precious metal has few practical uses, and doesn't pay interest or dividends. What it does do, though, is offer protection when investors start losing their heads. That’s because when investors panic, they instinctively buy gold, driving the price upwards.

Over the last 20 years, which has seen the dot.com crash, 9/11 terror attacks, financial crisis and now the coronavirus, the price has risen an incredible 450%. You don’t need to buy gold bars but can invest cheaply and easily through ETFs such as VanEck Vectors Gold Miners ETF or SPDR Gold Trust, an actively managed fund such as BlackRock Gold & General, or even individual gold mining stocks.

I would be wary of rushing into gold at today's inflated prices, as the price may plunge when coronavirus fears recede. I wouldn't exceed 5 to 10 per cent of your portfolio at any point.

Take your time over rebalancing your portfolio. This is not the time to dump shares to load up on gold, as this way you risk selling one asset at the bottom of the market cycle, and buying the other at the top. As always, managing your money is a tricky balancing act.

Harvey Jones has been a UK financial journalist for more than 30 years, writing regularly for a host of UK titles including The Times, Sunday Times, The Independent and Financial Times. He is currently the personal finance editor of the Daily Express and Sunday Express, and writes regularly for The Observer and Guardian Unlimited, Motley Fool and Reader’s Digest.

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Please note the value of investments can go down as well as up, and you may not get back all the money that you invest. Past performance is no guarantee of future results.