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Noise, noise, noise!

Investing is risky. Anyone who says otherwise is mistaken. But there are also risks in not investing – inflation being the most obvious. Unfortunately, many investors discovered a new risk during 2019 – liquidity risk – the inability to access assets when desired. But hopefully those with a financial adviser will have diversified portfolios, so any issues suffered by being unable to access funds will have been on only a small part of their overall portfolio.

Hardly a day goes by without news of US-China trade wars, the risks to the UK economy of a no-trade-deal Brexit or bond yields rising - is now a good time to invest or should investors wait and see?

Of course, the fund industry keeps saying “invest for the long term” and “don’t try and time the market!”. But they are hardly an uninterested bystander – they are keen to keep customers investing so they can take their fees. After all it is not their money at risk!

Some perspective

Many fund managers, offer a range of risk profiled managed portfolios. They do this so that advisers can advise clients on the most suitable portfolio aligned to a potential outcome based on each investor’s situation.

It is assumed that the end client has a medium to long time horizon and can tolerate the ups and downs of the recommended portfolio. While many managers will try to position portfolios on a forward-looking basis, using their skill and judgement, to adjust asset allocation based on market conditions, very few will make big percentage moves in and out of cash.

2008

The last time we had a major “market correction” (fund manager language for losing money) was 2008 - the credit crunch.

Over one month (mid-September 2008 to mid-October 2008) the FTSE was down nearly 30% - £100,000 was turned into £70,000 over a 30-day period.

The average balanced fund was down about half of this – showing the value of diversification in a falling market.

The good news is that for those who stayed invested from the beginning of 2008 to the end of 2018 things looked a lot brighter. The FTSE 100 and the average balanced fund were up over 58% and 43% respectively.

Market timing

Had there been any “smart investors” who saw the credit crunch coming and moved to cash at the beginning of 2008, and then invested close to the bottom of the crash in Jan 2009, they would have seen remarkable gains of over 120% in the FTSE and over 70% in the balanced fund over the next ten years. However, I suspect that there were not many “smart investors” who managed to see it coming.

So, is trying to time when to go in and out of the market such a smart move? Well yes, but only if we could find a way to work out in advance when to move between cash and the markets. The holy grail of investing is to only be invested when the market goes up and to quickly move to cash before the fall comes. But few, if any, investors manage to achieve this.

Nervous investors who panicked after the credit crunch, or indeed those that had stayed invested in cash for the whole period, would not have experienced the “ups and downs” of the markets. Their money would have only risen by 6% between January 2008 and the end of 2018. But with UK inflation (RPI) running at 35% over the period they would have lost 29% of their worth in real terms.

Investors in absolute return funds did miss the “downs” of 2008, but they have also missed out on the “ups” since 2011. They only managed 28% return between 2008 and 2018, whereas the balanced fund investor made 43% (including the stock market fall of 2008).

So, what is to be done?

A wise investor might follow these golden rules:

  1. Remember investing is risky and a long-term pursuit
  2. Cash is potentially a good short-term investment, and you should always have enough put aside for a rainy day, or if you need a certainty of income over a given period
  3. Cash is likely to be a poor long-term investment as it fails to keep pace with inflation
  4. The average balanced portfolio has achieved inflation-beating returns while reducing the downside (and some of the upside) of a pure equity investment
  5. Timing the market would be great, but in avoiding the risks we could miss out on the returns
  6. Diversification (e.g. balanced fund investing) reduces the downside risk when markets fall, but is pretty good at capturing the upside when markets rise
  7. Low-cost, well-diversified solutions offer many investors an ideal solution or “core” holding

 

David Norman, Joint Founder and CEO, TCF Investment

David (DAN) Norman has held senior sales and marketing roles with life companies, banks and asset managers and was CEO of Credit Suisse Asset Management (UK) before jointly founding TCF Investment a decade ago.

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