Interest rates were cut twice in the second half of 2024 as Bank of England policymakers responded to a sustained fall in the rate of inflation. Yet the outlook for inflation and interest rates remains uncertain, with financial markets pricing in a slower reduction in rates than previously predicted.
And with President Trump proposing to impose potentially punitive tariffs on global goods when he returns to the White House in January, the outlook for global and UK inflation is particularly uncertain. That uncertainty means investors saving for their own future would be excused for feeling concerned. So how can you remain confident about having money invested through such uncertain times? The key lies in building a portfolio that’s robust – and diverse enough – to weather any storm.
By investing across a variety of different asset classes — stocks, bonds, cash, or others — sectors and regions, you can spread the risk much wider than when all your investments are concentrated in a single area. This means your portfolio is better positioned for different market cycles and conditions.
Attitude to risk
There is no one-size-fits-all approach. Indeed, choosing asset classes will depend on your attitude to risk. A cautious investor might have a portfolio containing fixed securities such as gilts, bonds and property, for example, while a more adventurous investor is more likely to have a mixture containing a higher proportion of equities, including the likes of emerging markets, as well as alternative investments such as property.
There are many fund sectors to choose from, with UK equity income funds hugely popular, for example. But don’t get carried away by a sector’s popularity. If you hold too many of the same type of fund you risk having a high overlap of holdings. That’s because many of these funds tend to hold the same big, blue-chip names, and so if, say, a dividend cut does happen these funds may bear the brunt and you will be over-exposed.
Income
If it’s income you want, then don’t forget to look at different types of investment vehicles. Investment trusts can deliver a steady income to investors, even in times of crisis. This is because they are able to hold back 15% of their dividends each year, to top-up payouts in difficult years. That means that some have very long records of raising dividend payments year in, year out.
It’s also important to look beyond investments on home soil. Stock markets around the world behave differently, so holding different equities globally will help diversify your money further. Global funds will come with currency risk, however.
Whatever the outcome of all the uncertainties on the horizon, it’s important to remember to take a long-term view and try to ignore the short-term noise. Stock markets are unpredictable at the best of times — and can move sharply in both directions. As long as you have a well-balanced portfolio you should be able to handle any market conditions. For long-term savers there will be plenty of time to ride out any short-term losses and see the value of the investment recover.
Use our comparison tools to help you make informed decisions about which investment platform to use.
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