A balanced approach
John Baron explains the benefits of using model portfolios
An investment portfolio should be like a good meal, something that suits your tastes, with all the correct ingredients in perfect balance. However, occasionally, portfolios look more like something that has been cobbled together from whatever you happened to have left over in the fridge. It’s not that the individual ingredients are bad, just that you don’t have all the right ones in the right amounts.
“A model portfolio is a set of recommended funds carefully designed to meet a specific financial objective at a given level of risk.”
One of the reasons for this is the way that portfolios are sometimes built up. Early on, when you have smaller sums to invest, you may choose just one fund to invest in, maybe a UK or global fund. Over time, as you build up a bigger portfolio, you decide to spread your investments a bit wider, so you add another fund or two. But what to add? A different geographical region? Different asset classes? Different manager? Or do you just plump for something that is currently popular?
The danger is that you end up with a portfolio where each fund you bought made sense at the time, but overall isn’t quite what you were looking for. Model portfolios can help prevent this kind of problem.
“A model portfolio can provide a broad exposure to different countries, asset classes, management styles, and so on.”
What is a model portfolio?
A model portfolio is a set of recommended funds carefully designed to meet a specific financial objective at a given level of risk. A bit like a recipe, it not only sets out which funds to hold but also how much to invest in each (‘the weightings’), normally expressed as a percentage.
A model portfolio can provide a broad exposure to different countries, asset classes, management styles, and so on. As both the model and each underlying fund are diversified, you are reducing your risk by spreading your investment even further.
The most important thing about following a model portfolio approach, of course, is getting the right model in the first place. Trying to build one on your own would be daunting. You could ask an expert to do it for you, such as a financial adviser or wealth manager. However, rather like eating out, this comes with an additional cost that may be prohibitive if you only have a relatively small amount to invest.
I run ten model portfolios made up predominantly of investment companies, each with a clear investment objective and risk profile. Our ‘Spring’ portfolio, for example, is aimed at younger investors who have time on their side and can take on a bit more risk. You can see the current breakdown of the portfolio below. ‘Winter’ is aimed at someone closer to retirement where the protection of gains becomes more important. There is a ‘Dividend’ portfolio for people who want to generate an immediate income from their investments, as well as ‘Green’ portfolios for investors who want to invest in an environmentally conscious way.
This is a non-advised service, so it is up to you to decide which portfolio or portfolios to follow and how much to put in each. You also have to buy and sell the individual investments yourself. However, we regularly review the composition of the portfolios and, whenever we make changes, we notify you so that you can make the same changes to your own portfolio if you want to.
Rebalancing
If you follow a model portfolio approach, inevitably some funds will do better than others. It is important to keep an eye on the portfolio and compare it to the model from time to time, perhaps annually. If the weightings of some investments have moved a long way from the original model, you may need to ‘rebalance’ the portfolio to bring it back into line.
This can disconcert newer investors, as it can mean selling investments that have performed well and buying investments that have not done so well. I sometimes hear the sentiment ‘Why am I selling my winners?’ This is understandable but misses the point of rebalancing. The model is designed to be suited to your needs and attitude to risk. If some investments become a bigger and bigger part of your portfolio, then the danger is that this will no longer be the case. Again, it’s a bit like a recipe – no matter how much you like an ingredient, just adding more and more won’t always improve the overall result.
“Model portfolios won’t protect you from falls in the market. But providing you choose the right model, and follow it carefully, then over the long-term it can provide a better recipe for success.”
Conclusion
Model portfolios won’t protect you from falls in the market. But providing you choose the right model, and follow it carefully, then over the long-term it can provide a better recipe for success.
If you want to find out more about the John Baron Portfolios please visit www.johnbaronportfolios.co.uk.
The John Baron Portfolios service is an independent offering and is not endorsed by the AIC.
The John Baron Portfolios - ‘Spring’ portfolio - Breakdown (to 31 August 2023)
Edinburgh Investment Trust
8.5%
Fidelity Special Values
7.0%
Finsbury Growth & Income Trust
6.5%
Henderson Smaller Companies
5.0%
Schroder UK Mid Cap Fund
4.0%
Murray International Trust
AVI Global Trust
6.0%
JPMorgan Global Growth & Income
5.5%
Pershing Square Holdings
Abrdn Private Equity Opportunities
7.5%
HarbourVest Global Private Equity
Pantheon International
Worldwide Healthcare Trust
4.5%
Herald
Impax Environmental Markets
HICL Infrastructure Company
CQS Natural Resources Growth & Income
JLEN Environmental Assets Group
3.5%
Cash
1.5%
Total
100%
