Barbie solves inflation!

As the cost of living crisis continues to bite, we saw a much-needed sign of relief this week as core inflation in June fell from 7.1% to 6.9%. Still grim, yes. But less grim.

Blame Mattel. They made the rules.

In my money world, the Bank of England and the Chancellor are Mattel. With their goal of keeping inflation to around 2%, we all know rates have been relentlessly rising more than most predicted.

The Bank of England will next meet to ‘make the rules’ on 3rd August. They will of course take heed of the fact that core inflation fell in June, but this fight isn’t over yet. The consensus view is that they will increase rates yet further although pundits are debating whether this will be by 0.25% or 0.5%.

Nevertheless, anxious mortgage owners will have seen very slight falls in the average fixed-rate deals this week, and so will be keeping their joint-free fingers crossed that the tide has turned.

Let’s go shopping

Every three months we look at the performance of ‘ready-made’ collections of investments for less confident or indeed less interested investors. These can be bought from so-called robo advisers, online from many high street bank names or from investment platforms.

We scrutinise how they’re doing and track high risk portfolios (ready-made collections of investments) – those with 75% or more in shares; medium risk portfolios – between 35% and 74% in shares; and low risk portfolios – those with under 35% in shares.

In a nutshell, if I had to summarise investment markets over the last few years in one sentence, I would say: If you’ve gone large on US shares and particularly tech, you have done well; if you’ve favoured supposedly less risky bonds and especially UK bonds, you’ve been in a world of pain.

You’re very brave, Ken

This is what Barbie says when she sees Ken take out a high-risk portfolio, ignoring the fact that the average high-risk portfolio returned 1.4% over the last 2 years – but the average low risk portfolio lost a painful 9.25%. In fact Ken did better because he avoided holding too many bonds at a time when interest rates were jumping – and so bond prices were falling.

Before you snort at these numbers, they are just the averages. The best performing high risk portfolio returned 6.9% over 2 years, after all charges. But on the flip side, the full horror story that has been UK bonds is seen with the worst performing low risk portfolio, which lost a massive 17% over the last 2 years. Gulp. You can see the full performance tables here.

It is the best day ever. So was yesterday, and so is tomorrow and everyday from now until forever.

Not in my world, doll. The last 6 months have categorically been better than the last 2 years for most investors. Every day is not the same.

Here’s one example. AJ Bell’s ready-made high risk portfolio has been one of the best performers since we’ve been tracking these in 2020. They’ve returned 6.6% over the last 2 years, second only to Vanguard LifeStrategy 100 which has returned 6.9%. “Jazz hands!” you cry, sarcastically. Well the last 2 years have been tough for anyone who didn’t just buy 7 tech stocks and more recently Japan. So 6%+ is pretty darn good.

However, investors do need to come to terms with the fact that today will not often be the best day ever. Over the last quarter AJ Bell has returned the least, posting returns of just 0.8% compared to Moneybox’s 3.4%. Why? A major contributing factor will be that they only have 32% of their portfolio in the Americas – top long-term fellow performers Vanguard and HSBC have 48% and 50% respectively.

Everyone will have a rocky couple of quarters or even a dud year from time to time. My advice to anyone looking at performance would be to avoid the lip gloss of the last 3 months and to really focus on the substance of the last 2 years – and ideally longer if available.

My heels are on the ground!

As interest rates turn, there is an important mind shift for us investors. Bonds (hitherto ‘flats’) are quickly replacing shares (‘high heels’) as the interesting option for the last 6 months of 2023.

I’ll repeat something I shared a few weeks ago. Of particular note for top rate taxpaying dolls. Government bonds (‘gilts’) can be bought on some investment platforms. Returns are not taxed so this is good for money not inside the tax shelters of the ISA or the pension. And by way of an example, you can currently buy a Government bond for 93p which you know will pay you back £1 in January 2025. Ooh Ken, you sexy bond.

As always I’ll bang on about diversification, and timing markets is usually a fool’s errand. But the road ahead looks very different to the past few years and bonds are worth more than a passing glance. We cannot rely on the tech-heavy US market to carry us forever, so make sure your money is covering lots of bases and regions.

Have a lovely weekend everyone. I don’t have anything big planned. Just a giant blowout party with all the Barbies, and planned choreography, and a bespoke song. You should stop by.

Holly

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