Achieving a 'Goldilocks' investment strategy

Getting the temperature of your investments just right

Brits turn to investing

An increasing number of Brits are turning to the stock markets, according to the latest FCA Financial Lives report, which revealed that 2 million more people were investing in 2022 in comparison to 2020;¹ the biggest growth being in men aged 18-34, with 4.3 million now owning an investment.²  Pandemic savings coupled with toppy inflation are likely reasons for the surge.

As swathes of new investors open themselves up to the possibility of greater financial freedom, this is good news. But dig a little deeper into the report and we find a calibration is slightly off: Brits seem not to be judging the temperature of risk in their investments correctly.

On one side of the scale, some investors have been blasting the porridge until searingly hot: with new investors showing a penchant for extremely high-risk assets such as individual shares, cryptocurrencies, contracts for difference (CFDs), peer-to-peer (P2P) lending and unlisted companies – likely drawn in by a new breed of investing apps, the thrill of volatile price movements and the alluring potential for juicy returns. What’s bizarre is that when asked about their appetite for risk, many of this same group baulked at the idea of extreme losses.

In contrast, on the other side of the scale, some savers are barely putting pan to hob: with the FCA painting a picture that many hold too much cash – likely unaware of the potential for inflation-busting returns that stock markets can bring over the long term, nor the corrosive impact of inflation on their wealth. Recent figures by stockbroker AJ Bell serve the point: of the £1.81 trillion that Brits hold in cash, £113 billion was lost in real terms over the past year alone.³

Not too hot, not too cold

When it comes to approaching risk in your investing strategy, what’s needed is a gentle simmer: not too hot so you face the risk of permanent loss of capital; not too cold so returns remain lacklustre and inflation erodes the value of your wealth.

Here are our three steps to forming a ‘Goldilocks’ investing strategy that balances the risks and gets the temperature just right.

1. Invest in appropriate assets for your time horizons

Shares are the riskier asset class, meaning the potential for higher rewards but also a strong likelihood of losses. Allowing a long runway of at least five to ten years will give your investments the time to ride out stock market volatility if market conditions become grisly. If you have fewer than five years, or are particularly risk-averse, consider less-risky investments such as bonds or cash savings, that may be better suited to your financial goals.

2. Always hold three to six months of living expenses in cash

Cash on hand means you don’t need to worry about having to sell stock market investments at inopportune times if you need cash for emergencies, freeing you to take the necessary risks with your investments.

3. Construct a ‘core and satellite’ portfolio

This strategy involves divvying up your portfolio into two sections, each with a different approach to risk. 

Core – invest the majority of your portfolio in well-diversified assets that are appropriate for your long-term financial goals. Investment trusts – such as Alliance Trust, which invests broadly in stock markets around the world – offer quick diversification and a professional investor-led strategy that navigates your investments through the inevitable stock market ups and downs.

Satellite – for those wishing to have a little fun with much higher-risk investments, dedicate just a small portion of your portfolio to the racy stuff. While they may perform strongly, they also may not, so make these investment outcomes unimportant to your goals and expect little by way of a return. This ensures you won’t bet the house.

Marcus de Silva is a Freelance Investment Writer

1. https://www.fca.org.uk/publication/financial-lives/financial-lives-survey-2022-key-findings.pdf

3. https://www.independent.co.uk/money/inflation-savings-loss-value-personal-finance-b2378131.html

This information is for informational purposes only and should not be considered investment advice. Past performance is not a reliable indicator of future returns. The views expressed are the opinion of Towers Watson Investment Management (TWIM), the authorised Alternative Investment Fund Manager of Alliance Trust PLC, and are not intended as a forecast, a guarantee of future results, investment recommendations or an offer to buy or sell any securities. The views expressed were current as at October 2023 and are subject to change. Past performance is not indicative of future results. A company’s fundamentals or earnings growth is no guarantee that its share price will increase. You should not assume that any investment is or will be profitable. Information contained herein has been obtained from sources believed to be reliable, but not guaranteed.  

TWIM is authorised and regulated by the Financial Conduct Authority. Alliance Trust PLC is listed on the London Stock Exchange and is registered in Scotland No SC1731. Registered office: River Court, 5 West Victoria Dock Road, Dundee DD1 3JT. Alliance Trust PLC is not authorised and regulated by the Financial Conduct Authority and gives no financial or investment advice.