For years now there has been an accepted way of allocating assets. Only a few months ago the FT spelt it out for us. Young investors, it said, should have 70% of their portfolio in equities and 15% each in cash and bonds. Middle-aged investors should have 50% in equities, and 25% each in cash and bonds. Finally, the retired should have only 20% in equities with the rest divided equally between cash and bonds. Overall, it has long been set in stone that your bond holdings should be related to your age: if you are 20, 20% of your holdings should be in bonds, if you are 65, 65% should be.
But while this may once have made sense, it now just seems slightly ridiculous. What if the young investor is not saving for retirement but to finance an MBA in three years’ time? An equity-based portfolio wouldn’t have got him much closer to being able to pay the fees at Insead over the last few years. And what if the 65-year-old has a huge buy-to-let property portfolio? Does he really want to be holding interest rate sensitive bonds too? The fact is that life is much more flexible these days than it was 50 years ago when these model portfolios were first worked out. Modern investors need their portfolio balance to reflect that
The other big priority for investors at the moment is adjusting to the fact that interest rates are going to rise. That means if you haven’t looked into fixing your mortgage yet, now’s the time. Note that a good 90% of Britain’s mortgages are on variable rates. In fact, now’s the time to look at all your debts and see if you can’t reduce them or organise them better.
There is, for example, very little point in having a repayment mortgage if you are only planning to stay in a house for a few years. The interest payments tend to be front-loaded – you pay them before you start paying off the capital – so you will find that after five years you’ve paid out a lot more than you would have with an interest-only mortgage, but you still owe just as much. And if you haven’t got a mortgage? Don’t get one. This is really no time to buy property in the UK.House prices are up at around 5.5 times average earnings (as they were back in the late 1980s) and equity withdrawal is near historical highs as a proportion of income. But home owners will soon begin to realise that in a low inflationary environment their huge debts aren’t going to be inflated away for them. When they realise how much real debt they are accumulating, they will stop taking it on. I think house prices are in for a nasty fall, but even if I’m wrong, they certainly won’t rise much more.