It is more than 12 months since we wrote to clients at the start of the first lockdown. At the time of writing, we had no real idea what the short- or medium-term future would hold for investors.

Our advice was to sit tight and ride out the storm. We suggested that, wherever possible, clients should look to reduce their pension and investment drawings for non-essential income. Many clients followed this advice which protected their funds from being eroded too much as markets fell.

Twelve months on and we are in a very different situation to March last year, which I have to say we would not have predicted. Fund values have recovered and, in many cases, surpassed their pre-Covid values. What this dramatically demonstrates is that it is impossible to predict the future of investment markets.

There is always a temptation to change investment strategy at a time of crisis. This is normally disastrous as the change tends to be implemented after investment values have fallen, therefore crystallising the loss.

Clients wrongly believe that they will reinvest when stock markets bottom out and therefore recover the monies lost as markets rise. What happens, in reality, is that these clients delay in investing until markets have recovered and miss out on the recovery.

I am very pleased to report that all our clients took our advice to retain their existing investment strategy and have therefore not suffered any losses. Most clients found that they actually saved money during lockdown as there was little opportunity to spend. This seems to have been the one positive from the experience.

So where are we now?

It appears that world markets are looking past Covid and into a post-Covid future. We appear to be back to a more normal investment environment where commentators, analysts and fund managers are in their usual disagreement about what the future holds!

World stock markets have recovered and exceeded pre-Covid levels, with some markets hitting historical highs. There is consensus that the world economy will see substantial growth and that lockdown has turbocharged innovation and technological development.

Some commentators are convinced that we are entering a period of unprecedented growth and stock market increases. Others are worried that markets are over-valued and that they are unsustainable at their current levels.

There is no doubt that world stock markets have made a remarkable recovery. Part of the knock-on effect of this is that the traditional safer “fixed interest” investments, which are government and corporate bonds, are now considered to be less secure.

The main reasons for this are that there is a consensus that interest rates will increase from their current historical lows. The effect of this is that the income generated from these bonds will become less attractive as investors move to higher interest rate investments. This selling will result in a fall in the value of these bonds.

Traditionally, in times of stock market falls and nervousness, short-term investors will sell stock market investments and buy more secure fixed interest which pushes up these values. Currently the general view is that bond markets will continue to fall in the medium-term and equity markets rise. This means that some investors have been reducing bond holdings and buying equities in the belief that this will provide the best opportunity for growth.

Where does all this leave our clients?

The answer is the same as 12 months ago. Again, no-one knows what the future holds and thus the same fundamentals apply when investing for the long term. Clients need to have the correct mix of long-term growth assets – equities – and short-term, more secure assets – fixed interest.

This then raises the question “why should we hold fixed interest assets?” if the consensus is that these holdings will fall in value over the medium term.

The answer is that they are there as a balance against stock market falls where the equity element of your portfolio could fall considerably. There will be equity falls in the future; the problem, as always, is we do not know when they will occur and how long they will last. When this happens, short-term investors will tend to again purchase fixed interest stock and the value will rise, thus providing an offset to the fall in the stock market assets.

It does not really matter, in our view, if fixed interest values continue to fall as this will be more than offset, hopefully, by increases in the stock market element of your investments.

Pulling this all together our ongoing investment strategy is that all clients should hold a portfolio of different assets which properly reflects their attitude to risk. This is why we always ask our clients who use our ongoing service to complete a new risk questionnaire each year to ascertain whether their attitude to risk has changed. We are finding that some clients have slightly increased their attitude to risk over the last 12 months, which is quite understandable.

The second principle of our investment strategy is to only use the highest quality fund managers who have very focused and transparent strategies which are simple to understand. They must also be very competitive from a cost point of view. These selection criteria rule out 95% of investment funds.

We hope this update is helpful. If you have any questions or would like to discuss any issues in greater detail, we would be delighted to do so.