Is your portfolio constructed like the England team?

The 2024 UEFA European Football Championship is underway and promises to be an exciting tournament. Managers have selected their squads and finesse their tactics – rather like investors examining the structure and components of their portfolios – by Rob Morgan

 
Each team’s manager will need to decide whether to play a progressive, attacking game or a more defensive one when selecting players. Using too many strikers, tricky wingers and ‘flair’ players is a riskier approach. Although it would provide an entertaining spectacle it could leave the team wide open at the back, resulting in either breathtaking victory or heavy defeat. A well-rounded team, which has the right balance of players of diverse types, is likely to provide a better chance of consistent performance and advancement through the rounds.

It should also avoid catastrophic losses that can’t be recovered from. The process involves some tough decisions, perhaps choosing between investments of similar types, but a portfolio should always be a well-judged compromise between focus and diversification.

Remember too that team selection is only half the job. As manager of your own portfolio the selection of appropriate assets prepares you for the match ahead, but you’ll also need to manage the game as it unfolds to capitalise on opportunities and avoid vulnerabilities. Rebalancing your portfolio can maintain its shape, just as football players need the discipline to keep their formation. Meanwhile, not all portfolio players are worth keeping for the 90 minutes, and the tactical use of substitutes can add impetus to the performance.

As the ‘coach’ of your own portfolio how can you balance the different ‘players’ to perform distinct roles?
 

Central midfield

 
Midfielders are all-rounders and must regularly be involved in both attacking and defensive roles. Their utility is rather like the role of broad global equity investments, providing the straightforward exposure to share markets that helps propel long term returns with little fuss.

A defensive midfielder such as Declan Rice might equate in a portfolio to global equity income funds that invest in more stable, dividend paying shares that tend to provide more dependable returns aided by regular income. Meanwhile, a more probing, attacking midfielder skilled at unpicking defences such as Phil Foden or John McGinn, might represent a more growth-orientated strategy.
 

Defence

 
Defenders won’t typically be the most skilful players on the pitch. Instead, they need to be steadfast to prevent opposition goals and provide a platform on which the team can play out from the back.

More dependable and defensive investments such as bonds play a similar role in a portfolio. Often it is safer and more predictable to lend to a business through bonds than be a part owner through shares. Although returns from bonds in the form of interest payments can be unexciting, they can provide steady, incremental returns and a relative anchor compared with riskier share-based investments.

Defenders can occasionally pop up with goals for the team too. A bullet header from a corner is always a possibility, and likewise bonds could provide stronger returns for investors should interest rates be cut by a more significant degree than widely anticipated.
 

Striker

 
A team comprised of just strikers would lead to footballing disaster, and similarly investors need to avoid fielding eleven Harry Kanes on the pitch. As England fans will testify there is only one Harry Kane, and there should only be a modicum of specialist investments in a portfolio.

Yet for longer term investors happy with the risks, some exposure to some structural growth themes such as technology, emerging healthcare and the transition to lower-carbon energy sources could help capitalise on particular opportunities and drive returns. Well-timed individual flair in and around the box can make all the difference.
 

Goalkeeper

 
All successful teams need a confident and capable keeper between the sticks, just like all financial plans need a cash reserve to fall back on. You never know what is around the corner and even in the most secure situations there could be a need to dip into cash reserves. You don’t want to have to sell investments or, even worse, borrow money in the event of an emergency such as an urgent car or home repair.

The extent of the shot stopping prowess you’ll need depends on how leaky your defence is – what could go wrong and by how much? As a rule of thumb, you should keep enough to pay your essential expenses for three to six months in case of unemployment or ill health. You should be able to cover costs like energy, mortgage or rent, travel and food costs. But every situation is different. You might need more if it’s hard getting work in your area of expertise, or if you have potentially costly family or other commitments.

Remember, you’ll need to ensure your emergency fund is easy to access. You can earn a decent interest on this balance in a savings account by shopping around, but don’t be tempted by a fixed-term interest rate or accounts with long notice periods for this purpose. Money locked away for a year is no good when you need cash quickly.
 
Rob Morgan is Chief Investment Analyst at Charles Stanley