Posts

The Pain and Pleasure of Diversification

Could’ve, would’ve, should’ve!

It is human nature to look at an investment that has done particularly well and wish you had been invested in it. We all risk being dragged into ‘if only’ mind games: ‘If only I had put a £10,000 into Amazon in 2003, I’d be retired by now’ 1. ‘If only I had bought Bitcoin at £1…’. These thoughts are dangerous to investors, as this fear of missing out (FOMO) can tempt them into taking speculative risks, often based on a rear-view mirror perspective. Concentrated risks have concentrated outcomes, both good and bad.

We have a lot of respect for the fund manager Neil Woodford, but anyone reading the news lately will have seen that his concentrated, high conviction, long-term strategy takes a lot of living with, which few investors seem to have the stomach for. His fund, which peaked at above £10 billion, has less than £4bn in it today and the doors are currently closed to new money and withdrawals. Concentration risks are real.

A powerful insight into the dangers of owning a concentrated portfolio can be found in a piece of research on the US market from 1927 to 2015 2. Of the 26,000 companies that have been listed on the US exchanges, only 36 made it through the whole period. The total wealth of $32 trillion generated over the period was entirely accounted for by just 4% of companies. The market as whole – the good and bad in aggregate – delivered an annualised return of nearly 7% after inflation p.a. i.e. investors doubled their money roughly every 11 years, over this period. That’s a pretty good outcome and a direct consequence of being diversified.

The difficulties of trying to time markets or to pick companies, sectors or managers, in the face of little evidence that professional investors have persistent skill in these fields suggests that a rational investor should eschew such approaches and seek to place their investment eggs across a wide range of baskets.

Diversification is ‘always having to say you are sorry’

The challenge with owning a diversified portfolio is that sometimes investors fail to look at the big picture, diving into the detail of their portfolio valuation to pick out the fund that is not performing well, and possibly moaning about it. Underperformance does not mean that it is a bad fund or a bad strategy or a bad manager, particularly when systematic, low cost funds are used in the portfolio to capture market returns. It just means that some markets (or parts of markets) are zigging while others are zagging – the very essence of diversification!

A diversified portfolio is not always easy to live with, as there will always be something you don’t own that is doing better than the portfolio and always something in the portfolio that is doing poorly. So, if your adviser has to say they are sorry sometimes about an underperforming fund always remember that a) they are not responsible for market returns and b) they are acting in your best interests by making you remain diversified and stick with the programme.

1 In 2003 Amazon’s stock price fell as low as $7 per share. At the time of writing, the share price is over $1775
2 Bessembinder, H., (2017) Do Stocks Outperform Treasury Bills? WP Carey School of Business, Arizona State University.

Other notes and risk warnings

Risk warnings

This article is distributed for educational purposes only and must not be considered to be investment advice or an offer of any security for sale. The reference to any products is made only to make educational points and must, in no circumstances, be deemed to be any form of product recommendation.

This article contains the opinions of the authors but not necessarily DonaldWealth Management (the Firm) and does not represent a recommendation of any particular security, strategy or investment product. Information contained herein has been obtained from sources believed to be reliable, but is not guaranteed.

It is not a promotion of Donald Wealth Management’s services. Donald Wealth Management strongly suggests that no investor should act on any of these ideas without first seeking financial advice. Past performance is not indicative of future results and no representation is made that the stated results will be replicated. The value of an investment is not guaranteed and on encashment you may not get back the full amount invested. Errors and omissions excepted.

Donald Wealth Management is a trading style of Donald Asset ManagementLimited which is authorised and regulated by the Financial Conduct Authority in the United Kingdom (FRN: 223784). Donald Asset Management Limited is registered in England and Wales under Company No. 4675082. The registered office address of the Firm is: Stable End, 12 Heather Court Gardens, Four Oaks, West Midlands, B74 2ST.

 

 

Costs Really Do Matter

“Performance comes, performance goes. Fees never falter.”

Warren Buffett, investment legend, Chairman, Berkshire Hathaway (2018 Letter to Shareholders)

Costs, time and compounding are an insidious mix

It is a shame that human beings are so poorly wired to be good investors.  We have many deep-seated biases and behaviours that, whilst once useful to survive in the wild, do us a great disservice when investing. One area of weakness is our poor grasp of the exponential impact of compounding that can work both for and against us.

Imagine three different portfolios that deliver returns of 1%, 3% and 5% per year after inflation, but before other costs, over a period of 30 years: £100,000 invested in each would result in a growth of purchasing power to around £135,000, £240,000 and £430,000 respectively.  Seemingly small differences in the compound rates of return (geometric returns), turn into large differences, in terms of financial outcomes. That’s one of the great positives of a disciplined and patient approach to investing – small returns turn into big numbers, given time.

On the other side of the coin, costs – when compounded over time – eat away at these market returns to a far greater degree than many investors ever imagine.  Let’s compare two managers who deliver 3% gross (before fees) above inflation, where Manager A has costs of 0.25% and Manager B has costs of 1.00%. We plot the purchasing power impact of these different fee strategies on outcomes, across time, in the chart below.  As you can see, costs matter a great deal; an investor in Manager B’s fund is over £40,000 worse off than an investor with Manager A’s fund over 30 years. Put another way, you end up one third more wealthy selecting Manager A over Manager B.

Figure 1: Compounding is a powerful concept (1)

costs

(1) Compounding: Starting amount X ((1+rate of return)^number of years), where ^ is ‘to the power of’.

 

As Jack Bogle would say: ‘In investing, you get what you don’t pay for’. A pound of costs saved is more valuable than a pound of performance gained because you reliably get its benefits every year.

Risk warnings

This article contains the opinions of the authors but not necessarily Donald Wealth Management (the Firm) and does not represent a recommendation of any particular security, strategy or investment product. Information contained herein has been obtained from sources believed to be reliable, but is not guaranteed. It is not a promotion of Donald Wealth Management’s services. Donald Wealth Management strongly suggests that no investor should act on any of these ideas without first seeking financial advice.

 

Past performance is not indicative of future results and no representation is made that the stated results will be replicated. The value of an investment is not guaranteed and on encashment you may not get back the full amount invested. Errors and omissions excepted.

 

Donald Wealth Management is a trading style of Donald Asset Management Limited which is authorised and regulated by the Financial Conduct Authority in the United Kingdom (FRN: 223784). Donald Asset Management Limited is registered in England and Wales under Company No. 4675082. The registered office address of the Firm is: Stable End, 12 Heather Court Gardens, Four Oaks, West Midlands, B74 2ST.

The Two Types of Professional Networks You Need to Become Super Rich

There are two types of professional networks that you need in order to support your business and gain an abundance of wealth. Expansive networks and nodal networks are vital to becoming super rich.

  • Top entrepreneurs use expansive networks of many people and nodal networks with just a few contacts to generate tremendous wealth.
  • Nodal networks are tougher to build – they require deep relationships with exactly the right people – but they offer a tremendous return on investment of your time and energy.
  • Leveraging the connections of your own network members can work like rocket fuel – rapidly accelerating your success.

This article explains exactly what these networks consist of and how they could benefit you.

Click the image below to read the full article:

Professional Networks

 

 

 

 

 

 

 

 

 

 

Other notes and risk warnings

This article contains the opinions of the authors but not necessarily Donald Wealth Management (the Firm) and does not represent a recommendation of any particular security, strategy or investment product. Information contained herein has been obtained from sources believed to be reliable, but is not guaranteed. It is not a promotion of Donald Wealth Management’s services. Donald Wealth Management strongly suggests that no investor should act on any of these ideas without first seeking financial advice.

Past performance is not indicative of future results and no representation is made that the stated results will be replicated. The value of an investment is not guaranteed and on encashment you may not get back the full amount invested. Errors and omissions excepted.

Donald Wealth Management is a trading style of Donald Asset Management Limited which is authorised and regulated by the Financial Conduct Authority in the United Kingdom (FRN: 223784). Donald Asset Management Limited is registered in England and Wales under Company No. 4675082. The registered office address of the Firm is: Stable End, 12 Heather Court Gardens, Four Oaks, West Midlands, B74 2ST.

How to be the world’s worst investor! (Common and costly mistakes to avoid)

Question: “How do you make a small fortune?”
Answer: “Start with a large one!”

The $2 million dollar question

As you can see, the investment world is not particularly strong in the joke department. Unfortunately, this old joke is on us – the investor!

It is perhaps alarming to realise that a huge amount of wealth is destroyed by investors, as they fall into the traps set, either by human nature, or by those working in the investment and advisory industry itself. The harsh fact is that the wealth that is needlessly forgone will have a significant impact on their lifestyles and the opportunities that wealth brings to them, their families and their communities.

Let’s try and put some numbers on this wealth destruction: an annual study in the US(1) compares the returns that the US equity market has delivered over the previous 20-year period, against the returns that the average investor has made by investing in US equity funds. The result: for the period to the end of 2008, the market delivered a return of 5.3% after inflation on average per year (that is the compound rate of return). Did the average investor receive a comparable return? Not at all! In fact, the average investor managed to lose 1% a year after inflation, thereby depleting the amount of goods and services their investments could purchase.

If we transfer those return numbers into dollars and cents (as it is a US study), we can gauge the true level of wealth forgone by many millions of Americans. Imagine yourself in their shoes – you invested $1 million in the market in 1988, in a fund that sought to deliver the return of the market as closely as possible (these are known as index tracker or passive funds). You forget about it until the end of 2008. Your return, after fund costs – of say 0.3% per year – and inflation, was 5% per year. Your $1 million was now worth $2.7 million in purchasing power terms (i.e. the goods it could buy). On the other hand if you had made the same mistakes as the average American investor, you would have turned your $1 million into $800,000. That is an enormous opportunity cost of almost $2 million.

Figure 1: Throwing money away

wealth destruction - purchasing power effect graph

Source: Dalbar (2009)

We should not become complacent here in the UK, as a recent study(2) revealed that the average investor in UK funds received a return of around 4% below the market, per annum

Investment Trivia

The best performing US mutual fund over the 10 years to the end of January 2010 (The CGM Focus Fund) delivered a return of 18% per annum, yet the average investor received a return of minus (yes, minus) 13% a year.

Avoiding key mistakes

The encouraging truth is that being aware of the mistakes that many investors make and avoiding the traps that are set, allows you to take some simple steps to capture as much of the upside that is on offer from the markets, and that is rightly owed to you for the risks YOU take with YOUR money. These words are emphasised as you need to protect your interests from those in the investment industry whose interests may not be sufficiently aligned with your own. So what are the $2 million mistakes?

Mistake 1: Being human!

Unfortunately, we have been bowled a googly* by evolution that makes us susceptible to making poor investment decisions. While the human mind is an incredible thing, it has evolved a number of biases that, while useful as survival tools for everyday life, are the very basis for the wealth destruction that is so often evident.

A deep seated sub-conscious battle is constantly played out in investors’ minds, pitting greed and the desire for reward, against the fear of uncertainty, loss and social isolation. Its manifestation is irrational and emotionally driven investment decision making. Your emotions and innate biases – of which you may not be aware, such as over confidence, inertia, seeing patterns and trends where none exist, the desire to avoid regret, and going with the herd – can make you susceptible to poor decision making.

The whip-saw effect

Humans have survived by applying what they have just experienced and extrapolating that into the future – successful hunting grounds this year are likely to be good next – but this makes us all susceptible to making bad investment decisions. Mix in a bit of subconscious greed and the result is the temptation to chase ‘winners’, both in terms of markets – such as gold and emerging market equities – for no other reason than they are going up (or because the case is backed by a seemingly plausible story), and to chase brightly shining ‘star’ managers and funds.

The trend is not your friend

The problem is that the past is not a good guide to the future, as every piece of investment literature is obliged to state, by the Financial Services Authority (FSA). Yet every Sunday paper you pick up will have a money section full of tables and commentary on the best funds and managers, usually based on the past one to three years. Investors are prone to extrapolate these returns into the future. Mix in a propensity for failing to take account of the role that luck plays in short-term fund performance (lucky coin flippers will inevitably exist in these rankings, given that there are thousands of funds in existence) and it is easy to see how you can get seduced into believing that the short-term, market-beating performance will inevitably continue long into the future – it rarely does (3).

Figure 2: The cycle of wealth destruction

the cycle of wealth destruction

Up like a rocket – down like a stick

The problem is that markets inevitably go down as well as up, and managers run out of luck. The reversal causes concern, discomfort, fear and finally panic selling. The result is a buy-high, sell-low strategy – a recipe for destroying that $2 million of potential wealth.

Looking at the CGM Focus Fund, mentioned in the Investment Trivia box, we can see an extreme example of these human weaknesses in action: in 2007 this commodity-based fund returned 80% and, as a result, in 2008 investors poured a staggering $2.6 billion into the fund. Commodity markets reversed and the fund fell by almost 50% and investors withdrew around $750 million. Buy high – sell low!

Mistake 2: Not understanding the game being played

Through no fault of their own, many investors have not stopped to think about the game in which they are participating. Imagine that two investors own the whole market. The first picks and owns all the companies that did better than the market. By definition, the other investor must own all the stocks that failed to beat the market. One investor’s gains must be funded by another’s losses – trading in the markets is a zero-sum game (before costs).

That would not matter if skilled investors, who either must have better information than others or use the same information better, could turn this information asymmetry into profitable market-beating returns. You could buy their funds.

We believe that markets actually work pretty well, despite what professional fund managers will claim(4). Mispriced share ‘bargains’, on which those fund managers, pedalling the promise of market-beating returns, should thrive (otherwise known as ‘active’ managers), seem to be short-lived or hard to exploit profitably once costs are taken into account. There is no doubting the talent and hard work of those working as fund managers in the City, but the sad fact is that from the long-term evidence of their funds, most would provide a better service to their clients by staying at home!(5)

The evidence would seem to suggest that you should not try to beat the market, but simply try to capture as much of the return that capitalism can deliver in reward for owning companies (equities) or lending your capital (bonds), by using low-cost index tracking (passive) funds.

Mistake 3: Ignoring the maths

That leads us to the question of maths. One of the reasons why many active managers fail to achieve their marketbeating promise is that they have to overcome the costs of investing. These include the fees they charge for managing the fund and other expenses that are set against the fund’s performance. This ‘on-the-road’ cost of investing is known as the Total Expense Ratio or TER for short. On top of these costs are the costs of buying and selling securities held by the fund (turnover).

Let’s start with some simple adding

ignoring the maths leads to wealth destruction

That does not sound too bad if the markets have gone up by 30% in one year. However, in the context of long-term return history, equities have delivered a return after inflation of around 5% p.a. over the past 111 years(9).

Now for some simple percentages

1.9% is almost 40% of the 5% that equities have returned, over the long term, after inflation. In other words the investment industry participants have helped themselves to a large part of your wealth, yet you have taken all the risk, and it is your money and future at stake.

Now for some multiplication

Imagine that two identical funds exist and that they own all the shares in the UK equity market. The only difference is that Fund A has a cost structure of 1.9% p.a. and Fund B has a cost structure of 0.3%8 p.a. Let’s assume that the UK equity market delivers 5% p.a. over the next 30 years and you invest £100,000 in each.

Your investment in Fund A rises to about £250,000 – not bad until you look at Fund B which delivered you a little under £400,000 – a difference of £150,000!

The power of the mathematics of compounding (calculating interest-oninterest) combined with time is immense; small differences get magnified into large final outcomes. Costs really do matter in investing – the lower the better.

And finally some probabilities

The question you need to ask is: what is the probability that a manager will deliver skill-based, market-beating returns over the long-term? The empirical evidence indicates that we are probably looking at around 2%-3% of them3 . Remember that these managers have been identified with hindsight. The next question is: what then are the chances that you or an adviser can pick the few truly skilled managers today, who will deliver over the next 30 years? Answer – absolutely minimal. As Jack Bogle, one of the pioneers of index investing states “Don’t look for the needle, buy the haystack!”

At the end of this maths 101, it is probably easy to see the lesson that emerges – costs really do matter in the investment game. Again to quote Jack Bogle “In investing you get what you DON’T pay for!”

Good investing is not rocket science

At its simplest, investing is quite straightforward. You only have two things you can do with your money: buy part ownership in companies (equities), with the reward of dividends and hopefully share price rises; or lend your money to a government or a company, with the expectation of receiving interest and your money back.

It is not a get rich quick fix, but a slow controlled preservation of the purchasing power you have accumulated, and hopefully achieving some growth too, by taking, managing and living with specifically chosen and understood risks, accessed in a low-cost and effective manner.

A well-thought-through and evidence-based approach to investing should deliver better outcomes, over time. Perhaps most importantly we all need to hold our nerve when markets are either overly exuberant or in the depths of despair, and avoid the whip-saw of emotions and human biases.

If we can achieve that for our clients, we will have earned our annual relationship fee several times over.

Take-home points

  • Investors needlessly destroy wealth.
  • Emotions and human biases make us prone to poor investment decisions.
  • We ignore investing costs at our peril.
  • Sensible portfolio structures, robust process and hand holding by an advisor help to mitigate these risks.

We hope that you have enjoyed this article. Please do not hesitate to call if you have any questions or comments on it.

*For non cricketers, a ‘googly’ is a cricket ball bowled as if to break one way that actually breaks in the opposite way, in order to deceive the batsman.

End notes

  1. Dalbar Quantitative Analysis of Investment Behaviour, 2009
  2. Schneider, L. (2007), Diploma thesis: Are UK fund investors achieving fund rates of return? Submitted in July 2007, Fachhochschule Kufstein, Tirol, Austria.
  3. Bogle, John, C., (2007), The Little Book of Common Sense Investing, John Wiley & Sons, NY: NY.
  4. The Efficient Markets Hypothesis was developed by Professor Eugene Fama. It suggests that markets work effectively, incorporating all public information in a share price, which is the best estimation of a company’s true value. Prices change on new information and, as such, market movements are unpredictable and random. Mispricings are unpredictable and are rarely exploitable. The empirical evidence on the persistent failure of most professional investors to beat the market supports it. Seminal works: 1) Eugene F. Fama, “Efficient Capital Markets: A Review of Theory and Empirical Work,” Journal of Finance 25, no.2 (May 1970): 383-417. 2) A Random Walk Down Wall Street, by Burton Malkiel.
  5. Many studies reveal the same message. They are recorded in our [Investment Process Manual].
  6. The average UK All Companies actively managed fund has a total expense ratio (TER), which comprises the Annual Management Charge (AMC) and other fixed costs that can be offset against fund performance, of around 1.6% (Lipper 2009). Within that there is around 0.5% trail commission passed to commission-based advisers each year. Another 0.3% represents payments to fund platforms to cover the cost of holding the assets for the client. To make a fair apples-to-apples comparison, these costs have been omitted from the ‘all-in’ calculation.
  7. Other costs that are a drag on performance, relate to the decisions to sell and buy shares. The average turnover is around 100% of the portfolio a year (SCM Private 2010), which is based on estimated round trip costs (Albion estimate 2010) to sell and buy a share in the UK of around 1% (0.5% of which is stamp duty). This implies that the average active fund incurs around 1% of trading costs a year.
  8. Investors can access the UK equity market these days for around 0.2%. Index funds tracking the broad market have very low turnover and associated costs, estimated at 0.1% a year.
  9. Barclays Equity Gilt Study (2010)

 

Other notes and risk warnings

This article contains the opinions of the authors but not necessarily Donald Wealth Management (the Firm) and does not represent a recommendation of any particular security, strategy or investment product. Information contained herein has been obtained from sources believed to be reliable, but is not guaranteed. It is not a promotion of Donald Wealth Management’s services. Donald Wealth Management strongly suggests that no investor should act on any of these ideas without first seeking financial advice.

Past performance is not indicative of future results and no representation is made that the stated results will be replicated. The value of an investment is not guaranteed and on encashment you may not get back the full amount invested. Errors and omissions excepted.

Donald Wealth Management is a trading style of Donald Asset Management Limited which is authorised and regulated by the Financial Conduct Authority in the United Kingdom (FRN: 223784). Donald Asset Management Limited is registered in England and Wales under Company No. 4675082. The registered office address of the Firm is: Stable End, 12 Heather Court Gardens, Four Oaks, West Midlands, B74 2ST.

A Successful Wealth Protection Event

We would like to thank all those who attended our Wealth Protection Event in March. The event, which was hugely successful, took place on Thursday 30th March at Weston Park in Shifnal, Shropshire, starting with a champagne reception and ending with afternoon tea in the Orangery.

During the afternoon, we gained an interesting insight into ‘The Principles of Successful Investing’ – a talk by David Swanwick of Dimensional Fund Advisors, and ‘How to Protect Yourself from Cyber Crime’ – a talk by Phil Oakley of Outserve Ltd. The slides from Phil’s presentation are below. Click to view.

 

 

Absolute return promises – easy to make, but hard to keep

The combination of short-term market uncertainty, human nature and an immediately attractive sounding moniker for an investment is a marketing man’s dream.  The investment industry has been masterful at constructing and selling such products, not least ‘absolute return’ products,  which employ active management strategies that seek to deliver positive (absolute) returns in any market conditions i.e. up, down or sideways, with minimal losses.

By way of background, in June 2016 net inflow into these funds was £221 million, whereas equity funds suffered withdrawals of around £2.8 billion in the month.  In eight out of the twelve months to July 2016, the sector had the highest monthly net retail inflows[1], in response to the poor start to the year by equity markets and Brexit worries.

The Investment Association (IA), which represents the fund management industry in the UK, sets a three years horizon over which returns should be expected to always be positive in order to qualify for its absolute return badge.  However, it is worth noting that the IA itself states that it:

‘Recognises that there is a wide expectation among consumers and advisers that funds in the Targeted Absolute Return sector will aim to produce positive returns after twelve month periods.’

Yet the reality of being able to deliver on this promise is far from convincing: strategies are varied, complex and hard to compare; fees are high, relative to sensible alternatives; and correlations to underlying assets – such as equities and bonds – are higher than might be expected.

Testing the promises using UK data

The Investment Association tracks the performance of funds within the sector by looking at monthly rolling 12-month performance windows over the past 36 months i.e. providing 24, 12-month periods that roll forward one month at a time[2].  Only four of 75 funds (~5%) with at least 36 months track record had no losses in any twelve month period in the three years to June 2016.  At the other end of the spectrum, 15 funds had losses in more than half of the 12-month windows.

Given this outcome, it is perhaps not surprising that the FCA – the UK industry’s regulator – has recently confirmed that it will include absolute return funds in its wider review of the asset management industry and the value that it delivers to consumers.

Over five years to June 2016, the sector average returned 2.4% annualised, compared to 2.1% for short-dated global bonds (hedged to GBP) and almost 11% for developed market equities[3].  A simple 60/40 balance between global equities and bonds delivered around 7%.  While the top 5 funds delivered an average return of 10%, the worst five funds lost money over this period.  The sector as a whole has hardly covered itself in glory.

A recent piece of research on absolute return funds in the US[4] reveals that most active managers add nothing to performance over and above the known market risk premia returns.  The research also showed that equity-related strategies exhibit significant exposure to the equity markets and bond strategies exhibit significant exposure to bond markets, despite the freedom and flexibility to mitigate such exposures.  As such, losses should be expected from these portfolios when markets get tough.  Fees were high, too, with expense ratios ranging from 1% to 2% depending on the strategy.

In conclusion

As ever, the siren songs of the investment industry can draw the naïve onto the rocks.  There is little evidence at the sector level that suggests that absolute return funds really do add something different to traditional portfolios.  With exposure to market risks – and thus potential losses – high fees, and esoteric and complex strategies, most longer-term investors are better off sticking with their traditional, systematically managed portfolios.  Short-term market losses are part and parcel of investing and are not uncommon.  Those with the fortitude to stay invested and stay the course, should be well rewarded.  Patience, discipline and fortitude are the values that lead to success in this game. Absolutely!

Other notes and risk warnings

This article is distributed for information purposes and should not be considered investment advice or an offer of any security for sale. This article contains the opinions of the author but not necessarily Donald Wealth Management (the Firm) and does not represent a recommendation of any particular security, strategy or investment product.  Information contained herein has been obtained from sources believed to be reliable, but is not guaranteed. It is not a promotion of Donald Wealth Management’s services.

The past is not indicative of future results and no representation is made that the stated results will be replicated. Errors and omissions excepted.

Donald Wealth Management is a trading style of Donald Asset Management Limited which is authorised and regulated by the Financial Conduct Authority in the United Kingdom (FRN: 223784). Donald Asset Management Limited is registered in England and Wales under Company No. 4675082. The registered office address of the Firm is: Stable End, 12 Heather Court Gardens, Four Oaks, West Midlands, B74 2ST.

 

[1]     Investment Association. www.theinvestmentassociation.org/fund-statistics/statistics-by-sector.html

[2]     Investment Association Targeted Absolute Return sector monitoring information.  Month end: June 2016. www.theinvestmentassociation.org

[3]     Global equities – MSCI World Index (net div.); Global short-dated bonds – Citigroup World Government Bond index (1 to 5 years) hedged GBP; Global balanced 60/40 – 60% global equities, 40% Global bonds less 0.25% estimated OCF.

[4]     Klement, J., (2016), The Cross-Section of Liquid Absolute Return Funds, The Journal of Index Investing, Winter 2015, Vol. 6, No. 3: pp. 21-32.

The US election: the one thing we can be sure about is uncertainty

US Election Buttons

We are somewhat loathe to put out yet another piece about what might happen in the markets as it risks focusing long-term, sensible investors’ minds on short-term events. The referendum on Scottish independence, Grexit, China’s slowdown and most recently Brexit, have come and gone, in market terms, with most investors sitting on healthy increases in their portfolios since 2014, despite uncertainty at the time. However, it is not a bad thing to revisit the robust rationale for the structure of our client portfolios, particularly at such a time.

With less than a week to go before US citizens exercise their democratic rights and responsibilities, the race between the two Presidential candidates – love them or loathe them – looks too close to call. This campaign has, perhaps, brought out the worst of the US electioneering process between two polarising candidates, with much talk of a least-worst outcome. At times it has been unedifying, to say the least. Yet by this time next week, the world will have a new US President. No-one ever said that democracy was easy. As Churchill once said:

‘Democracy is the worst form of government, except for all the others.’

From a market perspective, share and bond prices, along with exchange rates, reflect all publicly available information, which includes the aggregate market view on both candidates, their economic and foreign policies and the various scenarios of who wins the House of Representatives and who wins the Senate. It is therefore next to impossible to second-guess, at this point, what might happen to markets in terms of directional movements. What we do know is that, like Brexit, there is likely to be a lot of uncertainty, which will be reflected in market volatility, as events unfold, and as market participants try to make sense of the outcome delivered by the US people.

It is also worth remembering that it does not really matter which party is in power, from an equity market perspective. The relentless growth of the US (and global) economy, driven by the desire of the private sector for profit, is ultimately reflected in dividends paid to investors and the real growth in corporate earnings that leads to stock price rises over the longer-term. Time is your friend.

Figure 1: Cumulative, nominal return – US equity market 1970-2016 in GBP and USD.

Cumulative, nominal return – US equity market 1970-2016 in GBP and USD

 

Data source: MSCI US Index TR from Morningstar Direct © Copyright. All rights reserved.

Risks and mitigants

Shorter-term risks to investors’ portfolios include equity market volatility (nothing new there!); rises in bond yields; and weakening of the US dollar. It is perhaps worth revisiting why our clients’ portfolios are structured as they are:

  • Your equity holdings are highly diversified: holdings are diversified across global economies (emerging and developed), across sectors and by individual companies. Although the US represents around 50% of the global equity markets, it is worth noting that around 45% of the sales of goods and services of S&P 500 companies are made outside of the US*.
  • Your bond allocations are defensive in nature: in the event that bond yields rise, again it is worth noting that US bonds form only part of the bond allocations held in portfolios and, where they are held, they tend to be short-dated bonds which are less sensitive to rises in yields (price falls) than longer-dated bonds. The majority of bonds held in portfolios are of very high credit quality, which tend to do better at times of market uncertainty, compared to lower quality bonds.
  • Your bond exposure is fully hedged, whilst equity exposure is unhedged: if the US dollar depreciates, then for investors with non-dollar portfolios, this could have a negative effect on performance. Any clients with US dollar portfolio will conversely benefit. However, as indicated above, 50% or more of the equity assets are in non-dollar assets and the 45% of overseas sales made by US companies will now be worth more in US dollar terms, supporting the US market. A similar phenomenon has been seen in the UK, post-Brexit. The bond allocation in portfolios will be largely unaffected by currency movements.

As ever, our advice is to stay put with your strategy and weather any storms that may come your way. Your portfolio is a sturdy vessel in choppy waters. Patience, discipline and fortitude will see you through. It is worth reflecting on the sage words of a former President:

Let us never forget that government is ourselves and not an alien power over us. The ultimate rulers of our democracy are not a President and senators and congressmen and government officials, but the voters of this country.

Franklin D. Roosevelt

Be it Clinton or Trump, they are only the vassals of the people.

*S&P Dow Jones Indices (July 2016), S&P Foreign Sales at 44.3%, Lowest Level since 2006.

Other notes and risk warnings
This article is distributed for educational purposes and should not be considered investment advice or an offer of any security for sale. This article contains the opinions of the author but not necessarily Donald Wealth Management (the Firm) and does not represent a recommendation of any particular security, strategy or investment product. Information contained herein has been obtained from sources believed to be reliable, but is not guaranteed. It is not a promotion of Donald Wealth Management’s services.
Getting investing right is difficult; please speak to us before you act independently.
Past performance is not indicative of future results and no representation is made that the stated results will be replicated. The value of a unit linked investment is not guaranteed and on encashment you may not get back the full amount invested. Errors and omissions excepted.
Donald Wealth Management is a trading style of Donald Asset Management Limited which is authorised and regulated by the Financial Conduct Authority in the United Kingdom (FRN: 223784). Donald Asset Management Limited is registered in England and Wales under Company No. 4675082. The registered office address of the Firm is: Stable End, 12 Heather Court Gardens, Four Oaks, West Midlands, B74 2ST.

The foundation stones of good investing

Scales weighing buy and sell options to illustrate investing decisionsInvesting is the process of delaying consumption from today to some time in the future and employing that money in the meantime in the markets to grow at a rate at least in line with inflation, but preferably more.  Investing money well requires a logical and robust framework on which to build a lifelong investment programme. Ten foundation stones provide the solid base on which to build such a programme.

Foundation stone 1: Have faith in capitalism and confidence in the markets

Capitalism is an adaptive, robust economic system that has delivered incredible developments to the benefit of mankind.  It may not be fair, but it has helped to drag many of the World’s poorest out of abject poverty over the past century.  It creates wealth.  The markets are an efficient mechanism for rewarding those who provide capital to those engaged in the pursuit of wealth creation.  

Foundation stone 2: Accept that risk and return go hand in hand

One of the inescapable truths of investing is that to achieve higher returns, you have to take on more risk (1).  That seems logical enough, but you would be surprised just how many investors seem to think that it is possible to get high returns with low risk.  The one thing we know for sure about risk is that if an investment looks too good to be true, it probably is.  

Foundation stone 3: Let the markets do the heavy lifting

In investing, there are two main sources of potential returns.  The first is the return that comes from the market and the second is the return generated through an investor’s skill. There are two main ways in which an investor – using their skill – can try to deliver a better return than the market return: one is to time when to be in or out of the markets (market timing), the other is to pick great individual stocks (stock picking).  Empirical evidence suggests that trying to beat the market is a tough game, with very few long-term winners.  As one cannot control the return of the market, and returns from skill are rare, the structure of your portfolio becomes key.

Foundation stone 4: Be patient – think long-term

There is no easy or quick way to investment success.  In the short-term, market returns can be disappointing. The longer you can hold for, the more likely the returns you will receive will be at worst survivable, and hopefully far more palatable.  It is time that allows small returns to compound into large differences in outcome for the patient investor.  If you want to be a good investor, you have to be patient.  Impatient investors tend to lose faith in their investments too quickly, with often painful consequences.  

Foundation stone 5: Be disciplined

Patience and discipline are close bed fellows.  Once you realise that to generate good long-term returns takes time, patience and belief in the markets, it is essential to put in place the discipline to stop yourself succumbing to impatience and ill-discipline.  Discipline comes in many forms: sticking to the principles above; constructing well-researched and tested portfolios that should weather all investment seasons relatively well; not chasing investments that have gone up dramatically, but sticking with the logical reasons for not owning them in the first place; and the discipline to not become despondent about short-term, unimportant market noise, and to focus on your long-term strategy.

Foundation stone 6: Build a well-structured portfolio

Once you accept that returns come from markets and are rarely enhanced by the judgemental approaches of professional managers of market timing and stock picking, it is evident that structuring a well-thought-out mix of different investments (referred to as asset classes) should sit at the heart of your investment programme. Your long-term portfolio structure will dominate the investment returns obtained during your investment lifetime (2).  

Foundation stone 7: Use diversification to manage an uncertain future

Not putting all of your eggs in one basket is an intuitive and valuable concept.  No-one knows what the future holds and owning a highly diversified portfolio is the key tool that we have to make sure that we are prepared for whatever the markets throw at us over time. It brings its own challenges.  Inevitably there will always be one or two parts of the portfolio that are doing well, but one or two that are not.  The patient and disciplined investor knows that there is little point in knee-jerk responses, and that this is simply the way that markets are.  The impatient and ill-disciplined will seek to change their strategy.  More fool them.

Foundation stone 8: Avoid cost leakage from your portfolio

Costs eat away at the market returns that you should be gathering for yourself.  Small differences in costs will compound into large differences over extended periods of time.  Investment industry costs are high, particularly those related to judgemental (active) managers.  If one takes two portfolios with the same gross (pre-cost) returns – one with a low cost of 0.25% a year and the other with a high cost of 1.5% a year – the low cost strategy will, on average, end up with a staggering 65% more money in the pot over 40 years (3).

Foundation stone 9: Control your emotions by adopting a systematic approach

Unfortunately, evolution has hard-wired the human brain to be particularly poor at making investment decisions. Evidence of wealth destroying, emotion-driven decision making is plentiful, as impatient and ill-disciplined investors have a propensity to chase fund managers, and markets that have previously performed well, and sell poorly performing investments.  Buy-high, sell-low is not a good investment strategy.  Research (4) reveals that this bad behaviour may cost investors around 2.5% per annum, on average.  Given that equities have only returned around 5% above inflation, on average, that is a material erosion of potential wealth.  

Foundation stone 10: Manage risks carefully across time

Our approach to investing positions us as risk managers, rather than performance managers as advisers have traditionally been.  Keeping the risk in your portfolio at an appropriate level is achieved through ‘rebalancing’ periodically back to your long-term portfolio strategy. Rebalancing involves selling out of better performing assets and buying less well performing assets i.e. selling, rather than buying ‘hot’ performing asset classes.   Fund selection and due diligence and the ongoing governance of the investment process are all important risk management functions.

Employing a systematic investment approach – like the one we have developed – provides the discipline and objectivity that is required to avoid the pitfalls that all investors inevitably face.  These foundation stones certainly make investing far simpler and easier, but never easy.  

(1) Sharpe, William F. (1964). ‘Capital asset prices: A theory of market equilibrium under conditions of risk’, Journal of Finance, 19 (3), pp. 425-442.

(2) Brinson, Gary P., Hood, L. Randolph, and Beebower Gilbert L., (1986) ‘Determinants of Portfolio Performance’, Financial Analysts Journal, vol. 42, No. 4, pp 40-48.

(3) Sharpe, W. F., (2013), The Arithmetic of Investment Expenses, Financial Analysts Journal, Volume 69 · Number 2, 2013 CFA Institute.

(4) Mind the Gap 2014 by Russel Kinnel, Morningstar. http://news.morningstar.com/articlenet/article.aspx?id=637022

Other notes and risk warnings

This article is distributed for educational purposes and should not be considered investment advice or an offer of any security for sale. This article contains the opinions of the author but not necessarily Donald Wealth Management (the Firm) and does not represent a recommendation of any particular security, strategy or investment product. Information contained herein has been obtained from sources believed to be reliable, but is not guaranteed. It is not a promotion of Donald Wealth Management’s services.

Getting investing right is difficult; please speak to us before you act independently.

Past performance is not indicative of future results and no representation is made that the stated results will be replicated. The value of a unit linked investment is not guaranteed and on encashment you may not get back the full amount invested. Errors and omissions excepted.

Donald Wealth Management is a trading style of Donald Asset Management Limited which is authorised and regulated by the Financial Conduct Authority in the United Kingdom (FRN: 223784). Donald Asset Management Limited is registered in England and Wales under Company No. 4675082. The registered office address of the Firm is: Stable End, 12 Heather Court Gardens, Four Oaks, West Midlands, B74 2ST.

 

The ordinariness of market falls – keep them in perspective

piggy rich bank in colors national flag of united kingdom fo

 

‘In the short run, the market is a voting machine but in the long run, it is a weighing machine.’

Benjamin Graham

It is not easy being an investor, but we can help ourselves

This note is written, not in response to the supposedly surprising and disappointing start to the year (or so the press would have you believe), but because of its very ordinariness. What we have witnessed is not extraordinary in the slightest, as we shall see. ‘The worst start to the year for decades’ is simply a good headline whipped up by the media. What is also neither surprising, nor out of the ordinary, is the emotional response of investors who feel unease about short-term market falls. Worry, panic and, on occasion, the temptation to bail out of a sensible investment plan is not uncommon.

The sad fact is that, as human beings, we are very badly wired when it comes to investing.   Our mental wiring, that evolved to allow us to make intuitive and rapid decisions to survive in the wilderness, does us a huge disservice when it comes to navigating the short-term vagaries of the markets. In the jargon of behavioural finance, the combination of focusing in on short-term events, coupled with the well-documented fact that investors feel twice as much pain from losses compared to the pleasure of gains, is known as myopic loss-aversion. It is a dangerous mindset, if long-term successful growth of wealth is the goal.

In this brief note we explore the obsessive focus on the immediate pain induced by short-term market movements, the very ordinariness of such market movements, and the need to retain a deep confidence in the ability of capitalism to generate wealth over the period of our investment horizon.

The remarkable nature of wealth creation through capitalism

Let’s start by looking at the remarkable, persistent and robust wealth creation of global capitalism. Although in extremis, capitalism can be divisive, cruel and abused – look no further than the evolution to ‘managers‘ rather than ‘owners‘ capitalism that pervades the Wall Street and the City – it is a remarkable economic system that has delivered astounding results, in terms of innovation, reduction of global poverty, as well as increased human longevity and birth rates. We should celebrate its achievement and harbour real hope for the future. Ponder on these thoughts for a moment that illustrate just how wrong we can be to doubt its power:

  • In 1899 Charles H. Duell, Commissioner of the US Patent Office, stated that ‘Everything that can be invented has been invented’. Enough said.
  • Even Bill Gates’ vision failed to comprehend a future in 1981 anywhere near what has turned out to be the case today when he said ‘640K [of RAM] ought to be enough for anybody’. How wrong he was! The RAM on the computer that this article was written on is 4GB.
  • It is estimated that around two-thirds of all those in school today will end up in jobs that don’t yet exist!
  • In our daily lives, things that a generation ago would have been seen in Star Trek, such as talking face-to-face with a friend or colleague on a hand held device are now part of everyday life, through FaceTime and Skype.

Innovation is not slowing but speeding up. Driverless cars are no longer science fiction, but a reality. Nuclear fission is no longer a pipe dream. The future is remarkably exciting.

Wealth creation is remarkably robust over time

The real (after inflation) growth in GDP provides us with a fair sense of how the world’s wealth has grown. In fact, the world’s GDP growth after taking account of inflation – for both developed and emerging economies – is estimated be around 3% in 2016, despite all the doom and gloom peddled by market commentators. It is easy to ignore just how remarkable this is because, as humans, we are hopeless at compounding numbers in our head. At this rate (using the Rule of 72), global output would double every 24 years. The figure below illustrates the real growth in GDP in the UK from 1948 to 2014. In 2007 the economy was booming, yet in 2016 we now produce more than ever before, yet it does not feel like those times are back.

Figure 1: Real UK GDP in GBP – a remarkable story

figure 1

 

 

 

 

 

So, despite the robust and enduring growth of global wealth and an exciting and optimistic view of the future, why do we get so despondent when, along the way, the equity markets fall?

Benjamin Graham’s voting and weighing machines

The subtle distinction between the long-term weighing machine (weighing up the economic returns due to investors providing capital) and the short-term voting machine that delivers the market’s moment-by-moment prices, sits at the heart of the challenge that investors face.

At its simplest, the price of a share is the aggregate view of all investors’ opinions of the future cash flows that the firm will generate discounted back into today’s money by a discount rate reflecting the perceived risks of the company. Some will believe that the price is too high and will become sellers of the stock and others will believe that the price does not do the company credit and be buyers. The equilibrium price at which buyers and sellers transact is the best estimate of the value of a company at that specific point in time, given the information available. As the release of new information is random, so will the movement of prices be, in the short-term.

Market movements simply reflect the aggregate impact of new news on the future earnings prospects and risk of all companies that make up the market. The recent news that China’s growth has slowed to a ‘mere’ 7% p.a. reduced the earnings outlook for companies around the globe and also dented some investors’ confidence. This is Benjamin Graham’s voting machine.

The weighing machine is the underlying, economic return – from dividends and the real growth in earnings – which an investor must eventually receive from the market, over time, driven by the interminable power of global capitalism.

The ordinariness of market falls

A simple way to illustrate how normal market falls are is set out in the figure below. What is shown is the depth and time that markets – in this case global developed market equities – spend falling and recovering back to a the previous market high (the right hand scale). As investors we could spend most of our time being disappointed, if we allow ourselves to be. However, take a look at the blue line (the left hand scale). It shows the growth of £100 over time, despite the frequent periods of being underwater below the previous market high. Note that these returns are after accounting for inflation.

Figure 2: The depth and longevity of being below a previous market high (1970 – 2015)

figure 2

 

 

 

 

 

The compound (or geometric) return over the period was a little under 4% per annum, after inflation. That means that £100 invested in 1970 became £533, despite the market crash in 1974, the oil crisis and sky-high inflation of the 1970s, the crashes of 1987 and 1990, the emerging market currency crisis of the late 1990s, the technology boom and bust, 9/11, the credit crisis from 2007 to 2009 and now China’s slowing growth. That is a remarkable outcome – that long-term investors benefited from – scattered with frequent, deep and occasionally prolonged periods of market adjustment. This is evidence of the weighing machine at work.

Why investors struggle with short-term market movements

Unfortunately, we are hard wired to ignore our rational thought processes and focus in on – and become emotional about – adjustments to share prices. Three key behavioural flaws, deeply embedded over millions of years surviving as a species, work against us.

The first is immediacy; this is the propensity to focus on something that is happening or has just happened, such as the readjustment of the outlook for global companies given China’s slowing growth rate.

The second is anchoring; humans have a propensity to fixate – or anchor – on a specific reference point; this might be the previous high level of the market, portfolio valuation or house price. Investors were pleased when the FTSE 100 passed through 6,000 in 2013, thrilled when it hit 7,000 in 2015 and despondent now we are back at 6,000 or so. It is easy to forget, too, that these companies paid dividends – one of the rewards of being an owner – of around 3% each year, not reflected in the index.

The third is loss aversion; this – as described above – is where the ratio of downside pain relative to upside pleasure is 2:1. Whilst that kept us alive in our pre-history, it hinders us as investors.

You can probably spot the problem and the conflation of these three traits when the market – acting as a voting machine – readjusts to new, less positive information. Unfortunately the immediacy and pain is amplified by newspaper headlines, commentators such as Robert Peston (formerly of the BBC, whose favourite word during the credit crisis was ‘contagion’), the evening news and irresponsible, headline grabbing research reports, such as that issued recently by RBS.

So what is the solution?

The rational approach to dealing with the problem of myopic loss aversion starts with marveling at the creativity of capitalists at work and the wealth creation that ensues. The second is to remember that the market movements do not reflect an absolute measure of despondency or elation in the economic world, but simply a readjustment of the price of shares relative to a previous view, based on new information.

However, given that most investors struggle to be rational when times appear bleak, we have a number of defenses that we can erect around us, perhaps the most important being able to ignore or cut out the stimuli that agitate us.

The best place to start is by ignoring the headlines and laugh at the news, particularly when you hear that multiple billions have been wiped off the value of UK companies; that the market has reached a new high; or that we are entering a market correction or bear market, which are both arbitrary descriptors of ordinary market movements. Ask yourself: so what?

The other thing to do is not to look at your investments too often. The table below makes it obvious why. The more frequently you look, the more likely you are to see a loss, the more pain you will feel, and the more you will fixate on market noise rather than the power of capitalism. As you can see, if you look weekly, you have an almost one-in-two chance that you will see a loss. In the worst week ever (during the period under review) the global equity markets fell by 22%. That is a frequency and magnitude of loss that most investors would find hard to stomach. Over any one-year period, you would have had a one-in-four chance of a negative return. Don’t expect your portfolio to go up every year; it won’t. Looking every five years reduces the chances of a loss to around one-in-ten.

figure 3

 

 

 

 

 

 

If you can’t help yourself from being concerned, perhaps work your way through the following mental checklist, when markets fall. If the answer to most of these questions is ‘no’, stop worrying:

  • Do you need access to the money invested today, or even in the next 5 years?
  • Is the market falling a surprise to you?
  • Has capitalism ceased to be a driver of global growth and wealth creation?
  • Is the global economy shrinking?
  • Is it a good thing to sell equities when they have fallen?
  • Do you think that the market will be below where it is today in 10 years’ time?
  • Do ordinary patterns of returns warrant extraordinary actions?

Helping ourselves

In essence, our advice would be don’t look too often at the value of your portfolio, stop listening to the hyperbole of the BBC and other media outlets and stop dwelling on the news. Do be optimistic about the power of the wealth creation potential of global capitalism, over the time frame you will be invested. We would even say, don’t come to your annual review meeting worried about movements in your portfolio since your last review. What matters is whether the value of your assets is still within reasonable expectations, despite being down (or up). Short-term market movements are simply noise and best ignored. Finally, remember when markets are down, one of the favourite sayings of the legendary investor, Jack Bogle: ‘This too shall pass!

 

Other notes and risk warnings

This article is distributed for educational purposes and should not be considered investment advice or an offer of any security for sale. This article contains the opinions of the author but not necessarily Donald Wealth Management (the Firm) and does not represent a recommendation of any particular security, strategy or investment product. Information contained herein has been obtained from sources believed to be reliable, but is not guaranteed. It is not a promotion of Donald Wealth Management’s services.

Past performance is not indicative of future results and no representation is made that the stated results will be replicated. The value of a unit linked investment is not guaranteed and on encashment you may not get back the full amount invested. Errors and omissions excepted.

Donald Wealth Management is a trading style of Donald Asset Management Limited which is authorised and regulated by the Financial Conduct Authority in the United Kingdom (FRN: 223784). Donald Asset Management Limited is registered in England and Wales under Company No. 4675082. The registered office address of the Firm is: Stable End, 12 Heather Court Gardens, Four Oaks, West Midlands, B74 2ST.

A disappointing start to 2016, but no need to panic

iStock_000006849616MediumIt is never a nice feeling when markets go through periods when they fall; and it certainly does not help to settle the nerves when we see sensationalist headlines like ‘RBS cries “sell everything” as deflationary crisis nears.’ (Daily Telegraph) or ‘Worst start to market year in two decades’ (FT.com).

To feel unsettled is natural; to panic and sell out of equities is an unreasonable overreaction to the normal workings of the market. Remember that there are many analysts and economists who do not hold these views, but headlines such as ‘Markets might go down or up, or sideways, who knows?’ are hardly going to make the front pages.

For those who have been around markets for many years, this is just another step – this time backwards – on the bumpy journey. Two steps forward, one step back would not be an unreasonable mantra for stock markets. Take a look at the chart below. It shows the quarterly performance of the MSCI World Index since its inception in 1975. One could hardly say that the returns of the past few weeks have been out of the ordinary.

Figure 1: Quarterly returns from global developed equities 1975-2015

history

 

Source: MSCI World Index (dividends reinvested) in GBP, before inflation

Looked at another way, using a chart that shows the magnitude of market falls and their recovery, recent market noise is far from unusual. That is the nature of equity investments.

Figure 2: Falls and recoveries in global developed market equities 1975-2015

markets

 

Source: MSCI World Index (dividends reinvested) in GBP, before inflation

For interest, we looked at the worst months of January in world markets since 1975. As we write, the UK market was down in January by around 7% at the close of business on 18th . Global equities are down around 10% since their high in April last year. The table below reveals that the start to the year has little bearing on the outcome for the year. There is no reason why it should.

Table 1: Worst Januaries since 1975 in global developed markets

Period Fall in January Return for year
Jan-09 -9.5% +30%
Jan-90 -9.0% -10%
Jan-08 -7.6% -30%
Jan-00 -6.1% -6%
Jan-03 -5.0% +21%

 

Source: MSCI World Index (dividends reinvested) in GBP, before inflation

Adopting a binary approach to investing, such as following RBS’s advice to ‘sell out of everything’, is nonsensical and for long-term investors, entirely inappropriate.   No-one knows what is going to happen in the markets. All we know is that over longer time horizons, equities are more likely to deliver higher returns than bonds and cash.

Remember too that any decision to get out of equities also requires another decision to get back in. What happens if you sell equities now and the markets rise from here? If the markets rise, you will have lost out. When would you pull the trigger and get back in? If markets crash, the chances are that you will be too paralysed with fear to get back in and before you know it the market will be up and you will have missed it. Markets tend to move with magnitude and rapidity. There is no-one ringing a bell telling you when to get in or out. Be brave and trust in your robust, diversified portfolio and simply stay invested.

A recent piece of empirical research[1], which looked at professional money managers who manage multi-asset portfolios owning bonds and equities, revealed the alarming truth that very few (less than 2%) of UK fund managers showed any ability to time when to be in or out of markets successfully. Perhaps not surprising if you believe that markets work. Jack Bogle – the investment legend who founded Vanguard – states:

“Sure, it would be great to get out of the market at the high and back in at the low. But in 55 years in the business, I not only have never met anybody that knew how to do it, I’ve never met anybody who met anybody that knew how to do it.”

Keeping events in perspective

There are some important things we encourage you to remember at times like these:

  • Markets work pretty well. They absorb all of the information publicly available to investors in their princes. The news on China is not new and should already be fully reflected in market prices.
  • As such, markets go up, down and sideways from time to time, depending upon the release of new information.
  • When investing, you do not make a financial loss unless you sell your holdings. As a long-term investor you have the luxury of being able to hold your assets until the storm passes.
  • Most investors own a well-diversified balance between bonds and equities and the performance of their high quality bonds will mitigate the effect of equity market falls on their portfolios. Remember, the headline numbers are not your numbers, as you are not 100% invested in the equity markets.
  • It is not all doom and gloom; the US and UK economies are still growing strongly. The UK has more people in the workforce than ever before. New car registrations have just reached an all-time high. Petrol is 99p a litre! UK GDP per head is above pre-crash levels.

As we always say, remember that investing is a long-term game that requires patience, discipline, fortitude and time. Stick with the programme and don’t look at the transient value of your portfolio too often, perhaps once a year. As a wise old sage once said:

‘Look at your cash everyday if you like, your bonds every three years and your equities every ten years’.

We concur.

Please feel free to give us a call on 0121 308 8034 if you would like to talk to us about any concerns or comments that you may have.

Other notes and risk warnings

This article is distributed for educational purposes and should not be considered investment advice or an offer of any security for sale. This article contains the opinions of the author but not necessarily Donald Wealth Management (the Firm) and does not represent a recommendation of any particular security, strategy or investment product.  Information contained herein has been obtained from sources believed to be reliable, but is not guaranteed. It is not a promotion of Donald Wealth Management’s services.

Past performance is not indicative of future results and no representation is made that the stated results will be replicated. The value of a unit linked investment is not guaranteed and on encashment you may not get back the full amount invested. Errors and omissions excepted.

Donald Wealth Management is a trading style of Donald Asset Management Limited which is authorised and regulated by the Financial Conduct Authority in the United Kingdom (FRN: 223784). Donald Asset Management Limited is registered in England and Wales under Company No. 4675082. The registered office address of the Firm is: Stable End, 12 Heather Court Gardens, Four Oaks, West Midlands, B74 2ST.

[1]     Clare, Andrew and O’Sullivan, Niall and Sherman, Meadhbh and Thomas, Steve, Multi-Asset Class Mutual Funds: Can They Time the Market? Evidence from the US, UK and Canada (April 2, 2015). Available at SSRN: http://ssrn.com/abstract=2589043