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Like many people in the UK, I own shares within an ISA and SIPP (Self-Invested Personal Pension). Historically, investing in equities via these accounts has been an effective way to build wealth.
Looking ahead, I still like shares as an asset class, but I do see a few risks to the market. With that in mind, here’s how I’m positioning my portfolio.
The risks
There are two main risks I see right now. The first is a near-term economic slowdown due to elevated oil prices. The second is a significant drop in consumer spending due to AI-related layoffs. Of the two, this one concerns me the most.
Now, neither of these scenarios may come to fruition. But I want to be prepared just in case. After all, this is my retirement money we’re talking about. I don’t want to see it disappear (bear in mind I’m in my mid-40s).
My asset allocation
Given these risks, I’ve made a few recent changes to my asset allocation. Firstly, I’ve dialed down my equity exposure a bit – overall my portfolio is now about 70% shares.
Second, I’ve increased my bond holdings so that they’re now about 10% of my portfolio. These are lower risk investments and they could do well if interest rates fall as I expect them to (bond prices rise when rates fall).
Third, I’ve boosted my money market/cash holdings to 20% of my portfolio. This lowers my overall risk and gives me options if stock market opportunities emerge.
My stocks
Zooming in on my shares allocation, this encompasses index funds, active funds, thematic funds, and individual stocks. In terms of individual stocks, I’m still heavy in five of the Mag 7 companies – Apple, Amazon, Microsoft, Google, and Nvidia. These are all long-term holds for me.
I’ve been trimming/selling a few other tech names though. I’ve done this mainly to reduce risk. One area of the market I’m trying to minimise exposure to is discretionary consumer spending (given the AI risk). There are some good names in this space, but I want to keep my exposure to a minimum.
Looking ahead, I plan to refine my stock portfolio further. I’m thinking of focusing it on two main areas:
- The AI/tech buildout: chips, data centres, power.
- Defensive businesses: Food, healthcare, defence.
This would basically be a play on further digitalisation. In theory, the AI stocks should do well as the world becomes more digital while the defensive shares should provide protection from a consumer slowdown.
A stock I’m looking at
One company I’m considering adding to my portfolio as a defensive play is Tesco (LSE: TSCO). No matter what happens in the economy people are always going to need food.
If the economy or consumer spending takes a turn for the worse, Tesco shares should hold up better than a lot of other stocks. The company could even see a higher valuation in the years ahead due to the fact that it looks immune to AI – this is very much a ‘HALO’ stock – heavy assets, low (chance of) obsolescence.
Of course, if the economy tanks, consumers may ditch Tesco and flock to Aldi and Lidl. This is a risk. Overall though, I see it as a safer pick, despite the fact it’s trading at an above-average valuation. A dividend yield of 3% adds weight to the investment case.
