The majority of investors are sensible as they diversify between equities and debt (bonds or fixed interest). A 60/40 portfolio differs in risk to a 40/60 or 50/50 or even 20/80 or 80/20. The point is how much debt is in your portfolio?
Our research shows Debt is a problem. In fact, Warren Buffet was quoted saying the same. I was interested in professional advisers webinar to discuss this topic. Is the 60/40 portfolio dead? What I heard makes me very uncomfortable. Let me explain.
If you have a portfolio valued at £1,000,000. Based on a 60/40 portfolio, then £400,000 is allocated to Debt. If Debt should be replaced, that would leave the portfolio manager or fund manager with £600,000 rather than £1,000,000. They have just cut their revenue by 40%. Instead, the portfolio managers are looking to replace debt with Alternatives. What does that mean? It means they still manage £1,000,000 but the portfolio is equity and alternatives focused. Whilst this may be good news for your fund manager, wealth managers, advisers in general, your question is whether it is good news for you?
In the panel discussion on the webinar, they talked about the use of alternatives such as US mortgages and emerging market debt. Whilst fund managers can sell you a good story about why these are appropriate, you have to know whether they are appropriate for you. That means you need to understand what you are investing in.
What do you do? If you were a judge listening to evidence, you make sure you get various professional views to understand both sides of any argument. Listening to your current wealth managers, fund managers etc is not both sides. Unless you take various views, your decisions will suffer from undue bias.
It’s time for a conversation.