Important information: The value of investments and the income from them, can go down as well as up, so you may get back less than you invest.

At this time of year, the one thing we’re not short of is predictions, forecasts and investment advice. I hope you’ve already had a chance to read our New Year Investment Outlook. If not, you can find it here. But we’re not alone in sharing our views on what to expect in the year ahead.

Perhaps unsurprisingly after a year in which shares have rebounded so strongly from their lows last spring, not everyone agrees on the direction of travel. Last week, Ed Monk and I devoted an episode of the MoneyTalk Radio podcast to the latest apocalyptic views of Jeremy Grantham, a well-known investor and the founder of fund house GMO. He believes complacent investors are busily inflating a stock market bubble that, in due course, will pop as bubbles always do.

Grantham’s views contrasted with those of another well-known investor, Howard Marks, who wrote an altogether more optimistic letter to clients of his company, Oaktree Capital. He said that his naturally more pessimistic view of the investment world had been tempered during lockdown by his much more positive son, also a professional investor, who had prospered mightily by investing in and sticking with the technology growth stocks that have driven the US market to new highs.

Well the debate continues. This week, I have enjoyed another couple of interesting pieces on this important topic. The first was a note from Goldman Sachs’s global equity strategist Peter Oppenheimer, who raised the possibility of a short-term correction in markets some time this year but stuck with the investment bank’s typically positive view that any temporary reversal should be seen as a buying opportunity.

The case for a near-term retreat is supported by a comparison with the market recovery from the financial crisis in 2009, which looks spookily similar to the rally from last year’s low. Back then, investors got ahead of themselves in 2010 and had to endure a meaningful setback before the bull market got underway again. The trigger for a stumble this year may, counter-intutively, be the roll-out of Covid vaccines, which some fear may provide central banks and governments with the cover they need to rein back the extraordinary monetary and fiscal support they are currently providing to the economy and markets.

But Goldman’s view is that we remain in the early stages of a longer-term bull market. It believes we have completed the first ‘hope’ phase, when stock market valuations rise in anticipation of better times ahead. We are now moving into the ‘growth’ phase, in which things actually start to improve to justify higher prices. The growth phase tends to be less explosive than the hope phase, but it can last for longer.

So, that’s the positive view. The more pessimistic outlook this week is provided by another high-profile investor. Seth Klarman runs a Boston-based hedge fund called Baupost Group and his New Year letter to investors, as reported in today’s FT, paints an altogether more cautious picture.

Mr Klarman believes the extreme actions taken by the authorities during the pandemic, in particular those of the Federal Reserve, have persuaded investors that the risks of investing have simply disappeared. He says slashing interest rates at the first sign of trouble and flooding the markets with liquidity have made it impossible to see what is really going on in the economy. In a delightful expression, he says investors are like frogs in a saucepan of water that is being brought slowly to the boil. They don’t notice the gradual increase in temperature but in time they will find themselves being boiled alive.

It’s worth noting that Mr Klarman’s investment approach is focused on the ‘value’ style which has underperformed as a consequence of central bank intervention. Keeping interest rates low has favoured growth stocks for which much of today’s value is justified by hopes for tomorrow’s profits. Low interest rates have made projected cash flows more valuable, he says, pointing to the extreme example of Tesla, the shares of which have soared ‘beyond all reason’.

What does all this mean for the rest of us, trying to make sense of the world around us and to manage our investments safely and prudently? Sadly, what it means is that the future is uncertain. We don’t know what will happen and we must position ourselves accordingly.

For me, this has always meant being extremely well diversified. By maintaining a balanced portfolio, with growth and value-focused assets, invested in a wide range of geographical markets, spread across shares and bonds, property, commodities and cash, I can sleep at night. I know that if markets go up, I will enjoy at least some of the gains. If parts of the market underperform, they will not blow up my whole portfolio. If one manager loses his or her touch, others can compensate.

This careful approach underpins my fund picks for 2021. I have exposure to the US through the Brown Advisory US Sustainable Growth Fund, to emerging markets through the Stewart Investors Asia Pacific Leaders Sustainability Fund, and to the UK through the Foresight UK Infrastructure Income Fund and the Fidelity UK Select and Fidelity Special Situations funds.

As the names of two of the funds suggest, there is a focus on sustainability - the environmental, social and governance factors that investors are increasingly looking to gain exposure to in their portfolios. I am also looking to generate income as well as capital growth. The value and growth investment styles are well represented.

If you do not want to pick your own funds, a one-stop alternative is the Fidelity Select 50 Balanced Fund which can invest in all of these as well as the other funds on the Select 50 list of our preferred funds. The fund is fast approaching its third anniversary since launch and to date it has delivered the smoother ride that we hoped it would when we asked manager Ayesha Akbar to take on the challenge of running this portfolio for us.

I spoke to Ayesha last week to get her views on how she is managing the fund and the outlook for the year ahead.

Important Information: The value of investments and the income from them can go down as well as up, so you may get back less than you invest. Investors should note that the views expressed may no longer be current and may have already been acted upon. Overseas investments will be affected by movements in currency exchange rates. Investments in emerging markets can be more volatile than other more developed markets. Select 50 is not a personal recommendation to buy or sell a fund. The Fidelity Select 50 Balanced Fund uses financial derivative instruments for investment purposes, which may expose the fund to a higher degree of risk and can cause investments to experience larger than average price fluctuations. There is a risk that the issuers of bonds may not be able to repay the money they have borrowed or make interest payments. When interest rates rise, bonds may fall in value. Rising interest rates may cause the value of your investment to fall. Currency hedging is used to substantially reduce the risk of losses from unfavourable exchange rate movements on holdings in currencies that differ from the dealing currency. Hedging also has the effect of limiting the potential for currency gains to be made. The Fidelity Select 50 Balanced fund investment policy means it invests mainly in units in collective investment schemes. There are just a few fixed limits for the three core elements in the fund. These are 30% to 70% for shares, 20% to 60% for bonds and 0% to 20% for cash. This information is not a personal recommendation for any particular investment. If you are unsure about the suitability of an investment you should speak to a Fidelity adviser or an authorised financial adviser of your choice.

Topics covered:

Volatility; Global; Active investing

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