Ben Yearsley: How we can get investment back on the right road

The Analyst

One thing I often get asked is whether I practice what I preach when it comes to investment. Hargreaves Lansdown are often in the press giving an opinion on a particular fund or market, but does that carry through to our own personal portfolios?

Customary investment wisdom dictates that being a young investor (I'm 33) with a long-time horizon, my balanced portfolio should have around 50% in the UK, 10% in the US, 10% in the Europe and very little in areas such as fixed interest. The last two years have shown that conventional strategies aren't always the best.

I have had to change my thinking of what I thought was suitable for my portfolio. For example, in the autumn of 2008, I had a large part of my ISA invested in gilts for the first time. Much of this money has since been recycled into absolute return funds that I see as a core of my portfolio for the long term; they are generally looking to achieve around a 10 per cent return each year, regardless of what happens to the market.

I took a large position in corporate bond funds, something I never thought I would buy. They simply fell in price so much that the potential return was too good to ignore. Admittedly I bought too early and was showing a loss for a long time, but I continued to buy and recently my investments became profitable as the bond market bounced.

The toughest part of any investment is deciding when to sell. I sold part of my bond holdings after making a 10% profit, but corporate bonds still look attractive and I am holding onto the remainder. It remains to be seen how long this opportunity will last and I'm not sure my portfolio will still contain bond funds by the end of 2010.

The profits were reinvested in several ways with Russian, Chinese, and infrastructure funds all getting additional exposure. Emerging markets have the best long-term growth potential, while infrastructure is a more predictable growth story happening in both developed and emerging nations.

I also sold other investments that made good gains since March and started moving the money into areas that have been left behind and now seem good value.

For example I have bought Neil Woodford's Invesco Perpetual UK Equity Pension fund for my SIPP. This fund, which is similar in many ways to his equity income funds, is defensively positioned. This hasn't been ideal over the last three months, but I have confidence in Neil Woodford over the long term.

The last year has shown that pragmatism is needed when investing. It is difficult trying to time an investment at the bottom of the market, therefore I took the view to keep investing sometimes weekly, sometimes monthly in order to average out my purchase prices. I am still following this philosophy with the remaining cash in my ISA and SIPP.

The recent strong market bounce seems to suggest we are over the worst. However, the economy isn't out of the woods yet, so holding different types of fund seems sensible. The same is also true for bonds – you don't want just investment grade or high yield, having both is probably optimal if you're willing to take the greater risks in high yield bonds.

As I said, I continue to invest with Neil Woodford and his "boring" defensive stocks. I also have funds with large banking exposures such as Schroder UK Alpha Plus. When taking the corporate bond and emerging market funds into account, it may sound like I'm being inconsistent. However, I think this diversification is pragmatic and hopefully it will work. Sometimes you need to turn conventional thinking on its head and look at alternative ways of constructing your portfolio.

Ben Yearsley is investment manager at Hargreaves Lansdown, the asset manager, financial adviser and stockbroker. For more information about the funds included in this column, visit www.h-l.co.uk/independent