As we move into 2014, it is a good  opportunity to look ahead to the next  twelve months and consider any  risks to your investment portfolio.

If you read the financial press during  2013, you would have seen many  worrying headlines. Arguably the  most alarming suggested that the  US might default on its debt for the  first time in its history. Thankfully, a  resolution was reached.  Nonetheless, talk about the world’s  largest economy being unable to  service its debt would be enough to  make the most adventurous investor  wary. This highlights that even a US  government stock is not without risk.  Indeed, US government stocks and  other fixed interest securities, such  as corporate bonds, may be at risk  during 2014, due to a reduction in  Quantitative Easing (QE).

You will be aware that many  governments have turned to QE in  order to “prop up” their economies.  QE effectively equates to “printing  money”, with the hope that this will  produce growth which will snowball,  leading to economic recovery. QE is,  however, not without its drawbacks.  Once QE has been introduced, it is  difficult to pull the plug without a  negative impact on the economy.  This is important as Mark Carney, the  new Governor of the Bank of  England, gave a speech suggesting  that QE may be reduced during  2014.       

What does this mean for your  investments? Fixed interest holdings  have traditionally been considered a  lower risk asset. They have been less  volatile than equities historically. As  such, fixed interest holdings are often  used to provide a more conservative  element to a portfolio. These  holdings may not, however, provide a  stable element to the portfolio this  year, as would traditionally be  expected.

A reduction in QE is likely to result in  a fall in value for fixed interest  holdings. So, what can be done to  minimise the risk within your  portfolio? A reduction in QE tends to  suggest that the developed  economies have returned to a more  consistent pattern of economic  growth. Whilst this may be bad news  for fixed interest securities, equity  markets tend to deliver positive  returns during times of growth. 

Does moving fixed interest holdings  into equities provide the answer?  The short answer is no. Whilst  moving to equities would reduce the  risk linked to holding fixed interest  securities, it would increase other  risk factors significantly. There may  also be tax consequences of rearranging a portfolio, which could  impact on planning. The important  thing is to seek professional advice,  in order to ensure that a full portfolio  review has been carried out and  other options considered, such as:

  • Switching to other types of fixed interest holdings, which may be  less susceptible to falls in value in  response to a reduction in QE.
  • Ensuring that your portfolio has a variety of different assets, in order  to diversify risk. In this way, falls in  value within one asset class may  be accommodated as they may  be compensated for by increasing  values of other asset types within  the portfolio.
  • Leaving matters as they are, and accept that risk associated with  holding fixed interest securities is  suitable for you, given the other  benefits they provide, such as  relatively stable income yields.

The decision as to which approach is  most suitable for you will depend  upon your own circumstances,  objectives and attitude to risk. At  Bond Dickinson Wealth Limited we look to ensure that our clients’  portfolios are diversified to manage  risk and to cope with market  fluctuations as and when they occur.