It pays to keep your balance when markets crash
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.
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.
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, Internaxx 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.