Head of Marketing, Ceris Hymas, explains why our clients were so happy with investment performance at the end of 2020 and explains why portfolio diversification is key to protecting wealth.
2020 was a tough year for most and it was certainly challenging for investors, who struggled to keep up with volatile and unpredictable financial markets. But despite this volatility and uncertainty, our clients were delighted to discover that they had enjoyed a net return on their PMW portfolio of between 7%-10% on average over the calendar year. They couldn’t believe that somehow, in all of the uncertainty, we had managed to continue to grow their wealth. We are asked regularly how we managed to achieve this. Ultimately, the reason why our clients were so well protected is that we have a deliberate and determined approach to investment diversification.
So, what is a well-diversified portfolio and how does it help to reduce the impact of market volatility?
The primary aim of a well-diversified portfolio isn’t necessarily to maximize returns, but to limit the impact of volatility. This is why the approach is best used for long term investments and those looking to grow their wealth with limited risk, over a longer period of time. Those who are not afraid of taking high risks, who are looking for quick wins and prepared to accept possible permanent capital losses, would favour a different approach entirely. At PMW we don’t believe in gambling with our clients well-earned wealth and that is why we favour diversified and well thought out portfolios that are able to withstand the test of time.
The most common way to diversify your portfolio is to spread your investment across a number of different assets. A simple way to explain this is to consider the performance of companies throughout 2020. Yes, many companies endured huge losses in 2020, especially those in the hospitality and leisure sector, but there are also many companies (such as tech and ecommerce companies like Amazon) who have made huge profits throughout the pandemic. If an individual had put all of their money into the shares of one company operating within the hospitality sector, they could have lost most or all of their money in 2020. Similarly, those who invested solely in a company that profited during this time could have made a considerable profit. An investor who cautiously spreads their investment across all sectors, would have mitigated their risks and could expect more modest profit/loss, despite the volatile markets.
At PMW we go one step further. We not only diversify portfolios based on individual asset classes, but also across different types of investments and locations, depending on our predictions for the year. We will not usually place more than 1% of any portfolio in one underlying company because even the biggest companies can fail. Investing in different countries and regions is also an essential part of diversification. Different countries experience different financial volatility at different times and by spreading the risk across a range of them, you can be sure you have a portfolio that is well balanced and better able to navigate the ever-changing world that we currently live in.
Of course, we would love to share more about our investment approach, but it is based on years of experience and constant monitoring of economic and financial trends that are ever-changing. What we can share with you is the reassurance that we have over 50 years of experience within the wealth management sector and our portfolio returns for 2020 demonstrate our ability to mitigate risk for our clients and deliver on our promises. This is probably one of the reasons why our clients voted for us as Wealth Manager of the year, Southern England at the City of London Wealth Management Awards 2021.
If you would like to find out more about our approach to investments or discuss your financial objectives with us, please get in touch.