Why Risk-Free Assets Matter in Investment Planning

The traditional approach to portfolio risk management often focuses on diversification across asset classes—typically a mix of equities and bonds. However, at Fowler Drew, we believe that true risk control comes from using genuinely risk-free assets, rather than relying on uncertain correlations between stocks and bonds.

This article explains how our approach uses cash and inflation-linked gilts (ILGs) to manage risk with greater certainty than conventional models.

The Problem with Conventional “Balanced” Portfolios

Most wealth managers use a “balanced” approach—combining equities with nominal bonds (government or corporate). However, this strategy has several weaknesses:

1. Bonds Are Not Truly Risk-Free

• Traditional portfolios assume bonds are a safe asset.
• However, nominal bonds carry inflation risk, and their real value can fluctuate significantly.

2. Stock-Bond Correlations Are Unpredictable

• Portfolio models assume that bonds will offset stock market declines.
• In reality, this correlation is not stable—bonds and equities can fall together, as seen in 2022.

3. Inflation Can Erode Real Returns

• Many investment models ignore inflation risk.
• Investors holding nominal bonds may not maintain their purchasing power over time.

The Fowler Drew Approach: Using Risk-Free Assets

At Fowler Drew, we take a different approach. Instead of relying on bonds for diversification, we use genuine risk-free assets:

1. Cash for Near-Term Spending Needs

• Cash deposits and money market funds provide liquidity for short-term spending goals.
• Holding cash avoids short-term market fluctuations and ensures certainty of capital.

2. Inflation-Linked Gilts (ILGs) for Longer Horizons

• ILGs provide real returns, adjusting for inflation.
• Unlike nominal bonds, ILGs ensure purchasing power is maintained.

3. Structuring Portfolios Around Time Horizons

• Instead of balancing between stocks and bonds, we match assets to time horizons.
• Short-term spending is hedged with cash and ILGs, while long-term goals are funded by equities.

Why This Approach Works Better

1. Predictable Risk Management

• With cash and ILGs, there is no uncertainty about value at maturity.
• This ensures investors can meet their financial goals with confidence.

2. Inflation Protection

• ILGs adjust for inflation automatically, making them a superior hedge for real spending needs.

3. Better Long-Term Equity Exposure

• Because short-term needs are hedged, investors can take more equity risk in the long term.
• This improves the likelihood of higher real returns over time.

How This Works in Practice

At Fowler Drew, we build portfolios using a goal-based approach:

• Short-term liabilities (1-5 years): 100% cash or ILGs.
• Medium-term liabilities (5-15 years): A mix of ILGs and equities, gradually shifting risk-free.
• Long-term liabilities (15+ years): Primarily global equities for growth.

This strategy ensures that investors never need to sell equities at a loss to fund spending.

2025 Update: Why Risk-Free Assets Are Even More Relevant Today

Since the end of Quantitative Easing (QE), the investment landscape has changed significantly:

• Higher interest rates have made cash and ILGs more attractive than in the past decade.
• Stock and bond markets have both experienced volatility, proving that traditional “balanced” portfolios are flawed.
• Inflation concerns remain high, making ILGs an essential tool for long-term financial security.

At Fowler Drew, our approach ensures that investors are protected against both market volatility and inflation, securing their financial outcomes with greater certainty than conventional portfolio models.