New clients, or existing clients with new cash to invest, often ask whether it might be better to hold off investing amid such uncertainty about the direction of markets.
2018 was not a good year for global markets and most asset classes, as many investors are well aware, and it is not surprising that many of our clients are worrying about 2019, particularly with the outcome of the Brexit circus and the impact on markets of a ‘no-deal’. My answer to these concerns is the same as with all those others before them, from the Asian debt crisis of 1998 through to the dot-com bust of 2000 to the credit crunch of 2007-09; through all the Eurozone crises and up to ‘red’ October of 2018. It goes roughly as follows:
The successful investor is the one who focuses on long-term investment objectives and sticks relentlessly to risk-management disciplines to guide his decision. This is in contrast to the retail investor who obsesses about short-term movements and extraneous market ‘noise’.
In the long run (five years or more) history shows that it is not so much about market timing as ‘time in the market’. In other words, the sooner you build that fundamental investment traction, a large part of which is all about harvesting income yields, the better.
The graph below from JP Morgan Asset Management shows the effect on overall returns when investors miss the best performing days in the market, usually after a period of heightened volatility or perceived ‘crisis’. It is one instance where ‘FOMO’ (fear of missing out) should prevail over ‘FOBO’ (fear of better options).
At the moment, clients are inevitably focused on Brexit fears and voice their intuition to leave investment decisions until after March 29th– or when the future seems clearer. This is understandable but not rational; it is just another manifestation of all of our fears of the unknown and should be recognised and dealt with as such.
There are four practical reasons why investors should not put off making a start investing a new portfolio:
Typically, at times such as these, a good investment manager would first build out many of the defensive allocations in cash, bonds, infrastructure and other low-risk assets. In the event of a bad Brexit outcome or other bad news, then these allocations act as a vital storm-anchor and some of the assets mentioned will tend to go up (modestly) in value as investors flee to these safe havens.
Second, a good investment manager will have long-since assessed the risks to the downside and moved accordingly, by increasing allocations to cash, near-cash and safe haven assets months ago. Only now would they be looking to expand into risk assets (typically, equities), which have over-reacted during recent volatility and where there are pockets of value beginning to appear. They are looking nine-12 months ahead.
Third, it always takes time and discipline to invest a new portfolio. Typically, a manager would average in new money across a wide range of assets over a period of months. The well-proven discipline of ‘pound-cost averaging’ allows for market highs and lows to be smoothed: the timing decision is never the crucial one.
Fourth, without getting too deeply metaphysical, it must be recognised that waiting is not a proxy for making the decision, it is merely fudging it. Thesimple truth is that issues, or perceived obstacles to decision-taking, are never removed. There is always uncertainty.
While a manager should try to take advantage of short-term market moves and exploit tactical opportunities, (for example, a sudden discount-widening in a favoured investment trust), in the end, their overall aim should be to establish the correct balance between all the main asset allocations. That is, to get the essential risk framework in position. This is far more important than short-term market-timing concerns. Looking back over all the crises of the nineties, noughties and now the teens, the focus on ‘risk’ rather than ‘timing’ has always held good.
Very few are successful at timing the market successfully. The old adage that the market can remain ‘wrong’ longer than one can remain solvent is proven true with almost monotonous regularity. Understanding that there are very few if any, shortcuts to sustainable capital growth in the ordinary investment world is the most important first acknowledgement.
Which leads onto the inevitable conclusion that the best investors are the patient ones, who ignore the obsession with ‘market timing’ or, worse, the folly of chasing markets up and down and who instead stick resolutely to their long-term objectives and risk disciplines.
At the end of the day, it does not actually matter when you start: as long as you make the decision to start. As the old proverb goes, the best time to plant a tree is yesterday. The next best time is today.
James Johnsen is Head of Private Clients at Church House
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