Six tips to investing late in the stock market cycle

Stock markets move in a series of highs and lows over the years – hopefully with the more of the former than the latter. But trying to time the peaks and troughs is impossible. As I've said many times before, if timing the market was possible, we'd all be very rich and have retired long ago!

What we can do, however, is make sure our investment portfolios are structured in such a way that we can participate in any continued market growth while, at the same time, having some sort of a cushion to protect us from the worst of the falls.

The most important thing to do is to make sure your portfolio is diversified. While it can be very beneficial to keep an allocation to equities at all times, as there may still be potential gains to be made, investors must make sure they don’t ‘bet the house’ on just this one asset class.

Handily, JP Morgan Asset Management* has pulled together some diversification tips to help investors weather the next downturn – whenever it comes. Here they are:

1. Geographical diversification is key

There are different dynamics at work in different regions of the world. For example, the US economy is looking reasonably healthy and the central bank has been steadily raising interest rates for the past three years. In contrast, the Bank of England is only at the start of this process and the European Central Bank is even further behind.

A fund to consider: Fidelity Global Situations

This is a solid core global equity fund, which can be held within a diversified portfolio. Manager Jeremy Podger uses the breadth of Fidelity's global research team to highlight the best ideas from around the world.

2. Don’t have too much invested in small and mid-caps

Small and mid-caps tend to struggle during recessions, particularly in the UK. For example, UK mid-caps lagged large-caps by 18% during the downturn between May 2007 and December 2008, according to JP Morgan Asset Management*. Of course, there are many benefits associated with holding small and mid-caps over the long-term: not least the fact that you can back exciting growth companies at an early stage. However, if you have benefited from holding these stocks over the past five to 10 years, it could be time to reduce this allocation and bank profits.

A fund to consider: M&G Global Dividend

Manager Stuart Rhodes has a bias towards mega and large caps in this fund (70% weighting in November 2018**). He looks specifically for companies with high and rising dividends with the aim of producing a good total return (capital growth and income together) in the long-term.

3. Hold quality and value stocks

If you held some of the world’s best-known growth stocks in your portfolios over the past five to 10 years, you are likely to be feeling smug. From Apple to Netflix, through to Alibaba – these stocks have delivered stellar returns for shareholders. However, as we enter the late stage of the investment cycle, history suggests that growth stocks may struggle. This is because there’s likely to be less momentum behind them if investor sentiment sours. In comparison, value stocks tend to trade at cheaper valuations, which means you are provided with more of a valuation buffer during times of uncertainty.

Funds to consider: Schroder Global Recovery & BlackRock Continental European Income

Schroder Global Recovery aims to build on the success of Nick and Kevin's Schroder Recovery fund. It could be well-positioned to capture a resurgence in value investing. Within our VT Chelsea Managed Funds, we have also added to our position in BlackRock Continental European Income, which focuses on quality dividend-paying companies that are undervalued.

4. Fixed income flexibility

Parts of the bond market exhibit different risk and return characteristics at different stages of the investment cycle, so a fund manager with the flexibility to invest in any fixed income asset will have an advantage during difficult or fast-changing markets.

A fund to consider: Jupiter Strategic Bond

During his time at the helm of the fund, manager Ariel Bezalel has demonstrated an aptitude for reading the economic cycle. What’s more, he is not afraid to change the positioning of the fund to suit where we are in the cycle – something that has allowed him to establish a strong track record.

5. Keep your powder dry

Holding too much money in cash can dampen returns in buoyant markets. However, during the late stages of the investment cycle, it can make sense to allocate a portion of your portfolio to cash and short-dated bonds. This can provide a cushion against any dramatic market falls and provides you with some dry powder if you identify any attractive buying opportunities.

A fund to consider: AXA Sterling Credit Short Duration

For investors who are seeking exposure to short-dated bonds, it is worth considering AXA Sterling Credit Short Duration. Manager Nicolas Trindade is able to take advantage of valuation anomalies in this part of the market.

6. Hold assets, or funds, with a lower correlation

Backing funds with a lower correlation to mainstream assets can provide a buffer during a downturn. There are a number of ways to do this. On example is to hold absolute return funds. Another option is to hold alternative asset classes, such as infrastructure, physical property and renewable energy, which tend to exhibit a lower correlation to equities and bonds.

A fund to consider: Church House Tenax Absolute Return Strategies

This is a multi-asset fund, which invests directly in assets, rather than using the fund of fund route. It is one of the few funds in the sector that targets an absolute return from diversification and risk management alone. It does not short sell any securities or indices for downside protection.

Past performance is not a reliable guide to future returns. You may not get back the amount originally invested, and tax rules can change over time. Darius's views are his own and do not constitute financial advice.

*Source: JP Morgan Asset Management Market Insights, October 2018.
**Source: fund fact sheet, 31 October 2018