I have recently been reading a lot about chess.  I learned the game at school but never played much other than the odd game at Christmas.  My fiancé, on the other hand, is very good at the game and to make a contest out of our game nights, I have been reading up on chess strategies and watching Netflix shows! 

The game has a nice parallel to investment management. You position your pieces gradually to checkmate your opponent, ensuring they can always play a move; otherwise, you get a stalemate. 

Investment management is very similar and arguably easier. You research the market (learning the game rules) then over time you change your portfolio to adapt to the market (reacting to how your opponent moves).  It is all about risk and reward.  If I risk my capital (pieces) in this area, will I be more rewarded than another? 

When I first started talking to my historical clients, I promised their investments would be positioned for market recovery when recovery came.  To do this, we had to let go of previous positions that were no longer as favourable as they once were.  

At times, their previous advisers stressed to make no changes to their portfolios.  Being the polar opposite position to us, any client transferring was ‘going against the grain’ in their previous adviser’s eyes.

Fast forward to 2021, and we see those clients who made the leap of faith highly rewarded. 

For one client, we ran a comparison of where they would have been had they followed their old adviser’s advice of no change and where they are now.  The difference is additional performance of 8.65% over seven months after making the changes.  Their pension fund is their main asset for which we have set a target of £800,000 by May 2022.

The 25% tax-free lump sum of £200,000 will allow them to pay off an interest-only mortgage secured over their primary residence.  From the resultant £600,000 pension fund, they will look to draw an income of £42,000pa (using our proactive decumulation service) which, should the fund achieve a target growth rate during retirement of 6%, will see the fund support this for 33 years.  For a 65-year-old client, attaining 98 seems a lifetime away and happily, while the investment markets will rise and fall during that period, with active management we will always ensure we get the risk/reward equation right to ensure they do not run out.  Performance of the capital is vital at all times.

For every unit of risk we take in investments, we should always look for the maximum return.

Sounds simple, but it can be highly complex if you allow your previous experiences and views on certain assets ‘anchor’ your actions.  We need to learn from yesterday’s experiences, but we cannot allow them to prejudice today’s actions.  Just because an asset hasn’t performed well when it previously did, is not a pre-requisite for holding on for eventual recovery.  When market conditions are not conducive to recovery, they will most likely see the asset remain depressed in value.  It is better to dispose of the asset and invest in a sector where there is a greater probability of returns (trade a pawn to capture a knight).

A good example would be some commercial property REITs (Real Estate Investment Trusts).  This sector saw significant declines in capital values and rental incomes in 2020.  Logically, if high street properties, offices, and some retail warehousing are unused with lockdown, tenants will not want to pay rent.  It is challenging for a landlord to rectify this with legal action, which will be extremely slow due to the lockdown and so many resort to extending leases and granting rent-free periods.  Changes that may benefit the REIT’s long-term performance but not over the short to medium.  In this scenario, it may be better to retire gracefully from the REIT sector and revisit it when the odds are more in your favour (don’t let your opponent swarm around you waiting to pounce). 

Technology, healthcare, and food retailers have conversely seen very conducive market conditions, and so their share prices have risen.  Netflix, Tesla, Microsoft, Google, and some lesser-known tech firms such as Square have performed very well since March 2020 and continue to do so.  A key reason being that businesses and individuals have turned to them during lockdown, investing significantly.

Making sure your investments (chess pieces) are in the right sectors (squares) is a process of reappraisal of the market (opponent moves), and they will always have the best probability of a return. 

Thanks for reading.