Don’t take this as regular investment advice. Financial regulators suggest you take independent financial advice and want you to understand your capital is at risk. The problem is much financial advice even from trained and regulated advisers is often incomplete, in my view. Taking account of "extra-financial assets" like social capital and intellectual capital is important. As is personality. Personal views follow.
Typical advice will start with your “appetite for risk” (although seldom any decent explanation of what that means for you).
The typical starting point in standard advice is a 60 / 40 Equity / Bond portfolio in low fee tracker funds (sustainability and stewardship notions, aside).
How the proportion of equity (or riskier assets) then varies depends mostly on one’s goals, circumstances, personality and ability to withstand risk.
Give that starting point, should you try to appropriately adjust that stance at all ?
Thinking only about financials then if you a) feel they have the requisite insight and (b) are willing to expend effort and bear the risk of being wrong.
Most people will not have skill in (1) positioning for the market cycle and (2) selecting superior assets.
This is because you are competing with many smart people all trying to out-analyse each other. A few do consistently win at this but it’s very hard work and not for the average person.*
That’s why billionaire investor Warren Buffet has advocated that a typical person puts 90% of their money in a low-cost stock index tracker fund and 10% leaving in cash.
Buffet moves away from the 60/40 portfolio as most people should have a long-term 10 year or 20 year+ horizon and stocks (also known as equities and shares) have historically done well over long periods. Of course this is less useful close to retirement but would likely hold for most people under 50, if you take Buffet’s view. The 60/40 portfolio is less volatile over shorter periods but over very long periods the 90/10 portfolio has tended to give higher returns.
That’s the typical advice:
-assess risk and personal circumstances
-Invest in low cost tracker funds
But this advice really only covers financial planning with typically a view on retirement and funding items such as schooling or property.
What is your most important “asset” ?
In many ways, your most important asset is YOU. And if you consider what can drive the "income" from the "You-Asset" you might to consider other "sources of capital" not only financial capital.
These other capitals could be considered intangible capitals like intellectual capital, social and relationship capital, cognitive skills you have or could learn, physical abilities or processes you have or could use.
Learning a languauge
Learning to Code, build websites
Design, Writing skills
Public Speaking Skills
Or, the ability to construct things or fix things
The strength, number and variety of friendships and relationships you have
Say, you have £2,000 you could invest. For simplicity, over 10 years, you earned a compound 7% return (which is middle of the road for many pension assumptions) you'd end up with about £3677.
It's looking good. But, say, there's a course that for £1,000 taught you how to code or learn a language or build furniture? Those skills might earn you £10,000s over 10 years. Perhaps, one of those skills will keep giving you an income in retirement as part time work. Or course, you will need time and deliberate practice as well.
It's not only your own intellectual capital, but it's the relationships you form. Nurturing relationships which give both parties reciprocal benefits can be very valuable.
For businesses, the Integrated Reporting Council, talk about "social and relationship capital" and while "personal brand and reputation" seems ugly business speak when applied to a person, the relationships we form are valuable and you might want to invest in them.
The last item to mention here is "personality/job". Here I recommend you be honest with yourself (or have someone assess you) and invest the opposite to what your job and personality suggest.
For instance, if you have a very stable, regular, low-risk type of a job and perhaps a risk-averse personality - it's probably more important to "diversify away" from this type and take on more risk assets eg equities than stay in safer assets like cash or government bonds.
Conversely, if you like sky-diving and have a job very leveraged to the business cycle - does very well in good times, high danger of losing a job in a downturn, then you should perhaps consider making sure you have adequate boring insurances, and make sure you have an adequate stash of rainy day cash or safe assets to rely upon. You should in your financial planning lean away from your risk-loving nature, and hedge your job risk.
So, putting this all together, thinking about your financial planning you should consider all aspects of your life such as your job risk and personality type. However, even more than your financial planning, you should also consider investing in your "extra-financial assets" such as your skills and relationships - you might get a much "higher return" on investing in yourself and your friends than you would in stocks and bonds.
* If you want to have a go considering the cycle timing... (Billionaire investor) Howard Marks suggests you should do this based on where the market is in its cycle. In short, when the market is high in its cycle, you should emphasize limiting the potential for losing money, and when the market is low in its cycle, you should emphasize reducing the risk of missing opportunity. How? Try to travel into the future and look back. In 2023, do you think you’re more likely to say, “Back in 2018, I wish I’d been more aggressive” or “Back in 2018, I wish I’d been more defensive”? And is there anything today about which you’d be likely to say, “In 2018, I missed the chance of a lifetime to buy xyz”?
What you think you might say a few years down the road can help you figure out what you should do today. The above decisions relate directly to the choice between aggressiveness and defensiveness. When an investor wants to reduce his chance of losing money, he should invest more defensively. More worried about missing opportunity? In that case, increased aggressiveness is called for. Varying one’s stance should be done in response to where the market stands in its cycle and, again, this can be approached in terms of how the market is valued and how other investors are behaving …"
Link to Ray Dalio and Howard Marks on Cycles
The Fear—Greed Continuum
Hyman Minsky - Economist on Cycles
If you'd like to feel inspired by commencement addresses and life lessons try: Neil Gaiman on making wonderful, fabulous, brilliant mistakes; or Nassim Taleb's commencement address; or JK Rowling on the benefits of failure. Or Charlie Munger on always inverting; Sheryl Sandberg on grief, resilience and gratitude or investor Ray Dalio on Principles.
Cross fertilise. Read about the autistic mind here.
More thoughts: My Financial Times opinion article on the importance of long-term questions to management teams and Environment, Social and Governance capital.