The investing journey of a chief investment officer’s son

MY YOUNGER son has begun his investment journey via a balanced portfolio – the majority in equities, 15 to 20 per cent in bonds and the balance in gold.

However, our eldest son took a very different path. Instead of building a balanced portfolio from the start, he invested 100 per cent in stocks, especially US equities.

His rationale was clear. The money, which we gifted for his 18th birthday, was a bonus and he did not need the cash for over 10 years. So, we looked at the historical performance of US equities over long periods of time. We found that it is very rare returns were negative over an extended time horizon. Meanwhile, he said he wouldn’t be checking his portfolio daily. Therefore, short-term market volatility would not be a problem – to him at least.

You can imagine my reservations about his approach. We will discuss the problem of geographic concentration later, but the 100 per cent allocation to equities made sense conceptually. My son’s time horizon was long enough to warrant a very high allocation to equities. However, I thought it would be interesting to see how he dealt with the inevitable portfolio swings.

Tracking the portfolio

Given that he began his investment journey in mid-2023, things started out very well. He basically invested 50 per cent into an S&P 500 exchange-traded fund (ETF) and 50 per cent into a Nasdaq ETF. By the end of 2024, they were up around 40 and 50 per cent, respectively. So far, so good.

However, in the second half of February this year, US equities started to weaken and fell about 10 per cent. It was at this point that I got a phone call to discuss “whether he should be worried”. Of course, you can stand back and say he is still up by around 30 per cent, but the reality was that he had mentally banked the 40 to 50 per cent gains and emotionally he was experiencing material losses for the first time. Hence, the phone call.

Thankfully, he was not panicking. He wanted ideas on how he might tweak his portfolio to reduce its volatility. Volatility was not a problem when markets were going higher and higher, but once they reversed, the emotions kicked in. I hear this all the time with clients, regardless of their experience level.

Managing volatility

Now, the obvious place to diversify would be in bonds and gold. The challenge was that both had rallied during the equity market sell-off. As a house, we were still bullish on gold at that stage, but we believed that US government bond yields, then at 4.25 per cent, were not super attractive. Therefore, my son decided he would be patient about re-allocating his money and would switch into bonds once yields had risen slightly.

The key here was to invest in a fund where the predominant exposure was high-quality investment-grade bonds, as sub-investment grade (also known as high-yield or junk) bonds would have a high correlation to equities even in relatively normal environments.

Of course, the next call came after “Liberation Day”, when US President Donald Trump imposed import tariffs on all major economies and US stocks plummeted by over 10 per cent in two days. While my son had diversified somewhat into bonds, his equity exposure was still sizeable and still 100 per cent in US stocks. The US exceptionalism story was coming under a lot of scrutiny, and this worried him. Therefore, he decided he wanted to diversify into other stock markets.

The “good” news was that stocks around the world sold off at the same time. So, while he was selling an asset (US equities) that had cheapened, he was also buying an asset – in this case European equities – that had also gone on sale. Therefore, emotionally, he found this switch easier.

Lessons learnt

As I reflect on the different journeys our boys took – the younger one built a diversified portfolio to start with and averaged into it over time – I am trying to figure out who has got the better education from this process, which was always our number one objective of giving them some money to invest.

The younger one learnt about portfolio construction from the start and does not check it often. However, this means he has no mental scars from the journey and therefore has probably learnt less about himself and his relationship with investing.

The older one learnt that investing is emotional and that the best way to deal with this is to be diversified.

They got to the same outcome – the benefits of a diversified portfolio – via very different routes. But my hunch is that my older boy has probably learnt more about what markets can do to your emotional well-being.

I guess the real risk of letting them decide their own investment approach is that if they had put 100 per cent into Bitcoin, and it went to the moon, they may have learnt the exact opposite of what I had wanted. Thankfully, neither chose this route.

(Steve Brice is global chief investment officer at Standard Chartered Bank’s wealth solutions unit)