Category: investment

You can’t predict the future, but you can learn from the past

If I had a penny for every time I heard someone say “If only we could predict the future” as they think about investing in the markets, then I’d be giving Warren Buffet a good run for his money.

Having said that, it always strikes me that we actually can go a long way to predicting market behaviour. It’s our ability to look back in time, into the established long-term patterns of the markets that can unlock the key to future returns. The past can provide a good indication of the economic cycles and their effect on future markets across the world. 

So what has history taught us?

If there is one thing that becomes clear when you examine the performance of the stock markets, especially in the UK and the USA, it’s that there is a consistent pattern of growth and returns; with world markets more frequently rewarding investors despite periods of economic slowdown and uncertainty.

Over the last 100, in the UK All Share Index, we’ve seen an average annual return of 7%. Obviously there have been years where large drops and gains have occurred, such as 1974, where the index fell 55% and the 1975 bounce back of a 136% increase.

However throughout its history, the standard deviation has been 21.5. Put simply this shows that for 66% of the last 100 years, returns have been between -14.5% and +28.5 with positive returns being delivered in 65 of the 100 years.

Putting your best FTSE forward

On 3 January 1984 the FTSE 100 was created. The FTSE is made up of 100 of the largest (by market capitalisation) companies in the UK; what we often refer to as ‘The Blue Chips’ and are the benchmark by which the stock market is measured and referred to in the UK.

To give you an idea of how The FTSE 100 has performed over the years, in 1984 it started with a value of 1000 and ended 2019 at 7542.44; which was itself 21.1% higher than where it was at the end of 2018.

In terms of really choppy waters, the largest one-day fall of the modern FTSE 100 was on Black Monday 20 October 1987, when the index fell by 12.22%. Whilst following the property and financial crashes of 2008 the annual price return was -31.3%. With the largest annual price return being 35.1% in 1989.

So we can see that although the FTSE 100 experiences its fair share of turbulence, the long terms returns have always been positive growth 

The Covid Crash

The markets have seen crashes happen before and they’ve always bounced back. Growth seems inevitable, although the trajectory, like all things in life, has its ups and downs.

However long-term data, both in the UK and in the markets overseas, clearly show that the trend is always one of growth.

Bear and Bull markets are created by panic selling and buying of shares in short-term reactionary reflexes to the growing and checking pains of the economy, both nationally and worldwide. 

So if your not into the short termism of Bull and Bear trading, then the trick is to understand the longer-term view, approach the investment markets armed with knowledge and patients and to sit fast in turbulent times and wait for the markets to come back. 

Make sure you’re working with a map

I think that the fastest way to ensure you end up on the losing side of the investment market is to just jump in with the hope that prices will rise across the board.

There are always winners and losers in both Bull and Bear Markets and throughout normal trading conditions. The trick is to understand where the potential opportunities and pitfalls are. If you’re not completely confident that you know the markets in the same way as the professional traders do, then please make sure that you are talking to an independent financial expert when seeking advice on any form of investing. 

There are some interesting points regarding the FTSE that you need to bear in mind, as they will certainly impact upon its overall performance as the years go by. 

For example, the index is never a good indicator of how the UK economy is fairing as a whole, as a many companies listed earn 75% of their revenues from overseas. With almost a fifth of the companies listed involved in mining and oil, all of who will face increased challenges as we move to a more environmentally aware existence, theirs is bound to be a downturn in that part of the index. 

There will always be industries that seem to be on the up. Green Energy, Pharmaceutical and Electric Cars spring to mind. History also shows us that their runs will not last. Just think about the dot com boom and what happened to most of those multi-million/billion valuations. 

If you’re going to invest by sector, do your homework and seek expert advice. In fact, whatever investments you are thinking of making, speak to an expert independent financial adviser before you do. It could open your eyes to a whole raft of unthought-of possibilities and may save or make you a fortune! 

Start with the right advice and stick with it

Please remember that markets can go down as well up and that past performance is no guarantee of future investment returns. But if you are going to invest, do your homework and seek expert advice.

The first thing you should do is to seek out expert independent financial advice. Chances are that it could open your eyes to a whole raft of unthought-of possibilities and may save (or make) you a fortune! 

As always, we at Bridgewater Financial Services are here to provide expert and independent advice and to answer any questions you have regarding investing in stocks, shares, bonds or any other investment strategy you may be considering. 

Please speak to an expert, even if it isn’t us, before you consider putting your money into the markets.  

Stay safe

The CORVID 19 GOLD RUSH

Please be mindful of my recent blog on the bandwagon effect http://bridgewaterfs.co.uk/2019/12/13/2019-election/well now seems the perfect time to re-stress some of the principles that I mentioned in the blog. Especially given the very real panic that Corvid 19 is causing both in the real world as well as the financial markets.

Specifically I want to address the recent activity in the Gold Market that has seen prices soar, as investors move assets into the perceived safety of this form of asset. 

Why it’s not the right time to buy gold

The price of gold has just halted as investors who were in for the longer term are taking their profits now. However with the traditional jumping onto the gold bandwagon in times of market volatility, for the normal investor there probably won’t be any killings to be made.

There is in fact, a real danger that you’ll be jumping to gold at or near to the top of the market. Meaning that unless you’re investing vast amounts into gold, there maybe little return to be made. Plus you have the very real concern of the journey back down, as the price of gold more properly reflects its place in the grand scheme, once the markets recover – and recover they will.

 

It might be the right time to consider selling

If you’re currently in the gold market and have been prior to the Corvid 19 prompted Gold Rush, then you may well be in a position where selling your investment could result in a higher than expected return. Especially as those desperate to hop onto the bandwagon are still keen to buy your gold at the current inflated market price.

 

Markets are in it for the long term

You should be too.

There have been many triggers for a run on the gold market over the past few decades. Investors get spooked as they know that the markets hate uncertainty; and pandemic viruses spread uncertainty as fast as they spread panic.

The tourist industry suffers, large-scale events get cancelled and the crossing of borders with people and goods becomes difficult or impossible.

All of this has the effect of depressing the markets and causing many of the larger investors to opt out of their usual activities. Hence they buy gold, or other ‘safe’ commodities, and sit the storm out.

They know that the storm will blow itself out, because it always does. They also know that when they get their timing right and return to the investment markets, they’ll be able to buy back in at an advantageous price. With this rush back to the investment markets driving values back to the levels they were prior to abandoned them to buy gold in the first place.

 

Ask any comedian and they’ll tell you it’s all about timing

However, abandoning the investment market in favour of the gilt-edged bandwagon could mean that the joke’s on you.

There really is no need to panic or react, as the markets always return to normal, once whatever it is that it making them jumpy passes.

Trust the past, because the one thing history has taught us over and over again, is that these things blow themselves out. Just like they did when SARS (2003), Swine Flu (2009) and Ebola (2014) caused similar panic selling.

In fact, the only time to ever change your direction of portfolio, is when your end destination changes, not because of any temporary bumps in the road.

 

A calming influence over troubled waters

As always, were here to help, whenever you need us. If you do have any further questions regarding anything I’ve raised in this blog, then please get in touch with us at Bridgewater Financial Services, where we will be delighted to help guide you through your individual options and strategies.

Trump’s Presidency and Your Portfolio

The unthinkable has (again) become reality: Donald Trump will be the 45th president of the USA, contrary to forecasts by vast majority of pollsters, big media outlets and experts.

After an unusually emotional and hostile campaign, with numerous strong statements from both Mr. Trump and his critics, many investors are worried that Trump’s presidency could bring radical changes which would negatively affect the economy and their investments. Are the worries justified? Should you expect losses in the months and years ahead? Are there any actions you can take to minimise them, or even profit from Trump’s policies?

Market’s Reaction to Election Result

Many of the same experts who got their election forecasts all wrong were also predicting a potential Trump’s victory would cause a stock market sell-off, weaken the dollar and boost gold price. This is in fact exactly what happened in the first hours, as more key states like Florida and Ohio started to turn red. The US stock market was closed at night, but the Dow and S&P500 index futures, which trade round the clock, were down more than 5% at one point. However, the panic quickly turned to optimism and the major indices were actually up at the end of Wednesday’s trading session. The Dow Jones closed at a new all-time high the next day and finished the best week since 2011 on Friday. So is Trump good or bad for the stock market?

Key Points Many People Forget

Due to the sheer intensity of the election campaign and its coverage in the media, many people have become overly emotional about the outcome – not only in the US, but also in the UK and elsewhere. Whether you personally supported Trump or Clinton, it was easy to feel like the world would be coming to an end if your candidate lost. Because strong emotions are rarely useful when making investment decisions, let’s remind ourselves of several key points.

Firstly, things said during an election campaign do not always translate into actions (this is not specific to Donald Trump). In the first days after the election, we have already seen Trump becoming softer on some of his plans, like repealing Obamacare.

Secondly, while having undeniably an enormous power, a US president cannot and does not govern alone. As one of the strongest, most established democracies in the world, the US political system has a number of measures and institutions in place to insure against a president going mad.

Thirdly, Trump’s surprise win has overshadowed another very important outcome of the election night: the Republican Party’s success in retaining its majorities in the House and Senate. The Republicans are traditionally considered the more pro-business party and therefore their victory may justify careful optimism in the financial markets. That said, we can hardly consider Trump a typical Republican president. Many of his plans will face tough opposition from “his own” party and the future outcomes are very uncertain.

Trump’s Economic Program and the Markets

Trump’s plans are a mixed bag with respect to the economy, corporate profits and share prices.

Making the US more protectionist would certainly hurt the stock market. Punitive measures against corporations outsourcing production to China or Mexico would not only harm these particular companies, but might also cause inflationary pressures and thereby pressures for interest rates to go up, with further negative effects on both stock and bond prices. That said, it is unlikely that Trump will find sufficient support for taking these plans very far.

A wider Republican support is more likely for tax cuts, another key point of Trump’s economic program. While clearly positive for company profits, lower taxes could also further stretch public finances, possibly repeating the fiscal cliff and debt ceiling crises of 2011-2013. Trump’s promised infrastructure investments (those “bridges, tunnels, airports, schools and hospitals” from his victory speech) would have a similar combination of effects.

In today’s complex and interconnected world, individual economic policy measures often have a mix of both positive and negative consequences, as you can see from the examples above. Therefore, it is very hard to predict the aggregate effects on the markets, even if we knew how exactly the new laws and policies will look (even Mr. Trump himself doesn’t know that yet).

What to Do with Your Portfolio

Luckily, sound long-term investing is not about making predictions. With the risk of repeating ourselves, it is “time in the markets, not timing the markets” that builds wealth in the long run. This is easy to forget when a strong story like the recent US election occupies our minds.

To conclude, the appropriate action to take right now is stick with your long-term plan and avoid making impulsive, emotional decisions. That said, we will continue to carefully monitor the developments in the US and the global economy and may review our recommendations going forward.

Overcoming Home Bias: Why You Should Invest Globally

Not surprisingly, for vast majority of British investors, domestic stocks and particularly the FTSE 100 index represent a substantial portion of their portfolios – often to the extent of neglecting or completely ignoring other markets. Today we will have a closer look at this phenomenon, known as home bias, and discuss the benefits (and costs) of taking a more global approach to asset allocation, particularly in light of the uncertainties ahead.

Home Bias

The home bias, or the home bias puzzle, was first recognised in the early 1990’s. It has been observed that investors tend to over-allocate funds to their domestic market – more than what would be justified when taking a purely rational risk and return optimisation approach. Numerous research reports have been published by bank analysts and academics, examining the causes of home bias and its effects on investment performance and risk.

Costs of International Investing and Causes of Home Bias

In general, there are three groups of factors which discourage investors from investing internationally:

  • Financial, such as currency conversion costs, higher fund management fees or custody fees. The significance of these has declined (but not disappeared) in the last two decades due to technology and the rise of ETFs and other passively managed funds.
  • Administrative, such regulatory restrictions, paperwork or tax issues.
  • Psychological. For instance, for someone living in the UK it makes more sense to invest in shares of familiar companies like Tesco or Marks & Spencer, rather than their foreign counterparts. Being able to see actual products or stores behind a stock symbol helps with trust and comfort – essential ingredients of the psychology of investing.

Benefits of International Investing.

If your portfolio only contains a negligible portion of international equities, or even worse, if you have all your funds in the FTSE 100, your risk and return profile is far from efficient. It is very likely that in the long run you will see lower performance and higher volatility than you otherwise would with a portfolio containing just a bit more of international equities. Of course, the actual future performance of equity markets in individual countries is impossible to predict, but it is the probabilities and the outcomes across a wide range of possible scenarios which must be considered. In one word, diversification.

Geographical, Sectoral and Idiosyncratic Diversification

One argument against international investing is that shares in the domestically listed corporations already provide sufficient exposure to economic developments in other regions, as many of these companies trade worldwide. The FTSE 100 is a good example, as 77% of its constituents’ revenues come from outside the UK.

That being said, the FTSE 100 lacks sufficient exposure to important parts of the global economy which you may not want to ignore. It is traditionally heavy in consumer staples and energy, but severely underweight in the technology sector. If your portfolio mimics the FTSE 100, you have over 8% of your funds invested in a single energy company (Royal Dutch Shell), but you completely lack exposure to companies such as Google, Apple or Amazon, for instance. These are at least as important to the global economy, and to the British economy too.

How Much Is Enough?

According to a recent report by Vanguard, which refers to the latest available (31/12/2014) IMF statistics, British investors hold 26.3% of their equity investments in domestic stocks – on average. In line with the home bias theory, this is much higher than the UK’s share on global market cap (7.2%) or GDP (4% nominal / 2.5% by PPP).

Does this mean you should only have 7% or 4% of your portfolio in British equities? Of course not. After all, if you live in the UK and your general interests, liabilities and future expenditures are in this country, there is nothing wrong with British assets representing a significant portion of your investments. The exact optimum weight of foreign equities is subject to personal circumstances, such as your income, other assets and liabilities. For instance, the property you own represents substantial exposure to the future well-being of the British economy, justifying a higher share of foreign equities.

Does Brexit Change Anything?

The Brexit uncertainty does not enter the equation, unless you personally have a strong opinion regarding the future development and want to gamble on that. If you don’t, remember that in line with the Efficient Market Theory, the stock prices (and the pound’s exchange rate) are already reflecting the market’s consensus and thereby all the currently available information.

In the long run and under the “hard Brexit” scenario, looser economic ties with Europe might result in a decrease in correlation between the UK and EU in terms of economic and stock market performance, increasing the diversification potential of European equities. However, this effect will most likely be marginal, if any.

Brexit …

Brexit becomes reality and the markets react with heavy selling of risk assets, particularly British and European stocks and the pound. The fears have materialised and the issue is taking its toll on investment portfolios. That said, the worst thing an investor can do at the moment is acting based on emotions rather than careful analysis of the situation. With the extreme levels of volatility that we are seeing now, a bad decision can have very costly consequences.

Market Volatility

The markets’ reaction can be best observed on the pound’s exchange rate against the dollar. In the last days before the referendum, it appreciated from 1.40 to 1.50 (7%), as polls started to predict a narrow Remain victory. This morning after the actual outcome it dropped to 1.32 (12% down), but at the time of writing this article it is trading around 1.39 (5% up from the morning low). Similar volatility can be observed on stock prices (British, European and worldwide), commodities and other assets.

The Market’s Reaction Is Not Unusual

While the fact of Britain leaving the EU is unprecedented and extraordinary, the way the markets react to the decision is not unusual. It is similar to the way markets react to other surprising outcomes of scheduled events, such as central bank interest rate decisions or (on the individual stock level) company results. We see a sharp initial move triggered by the surprising outcome (this morning’s lows), followed by corrections and swings to both sides, as the market tries to digest further information that is gradually coming in and establish a new equilibrium level. These swings (although perhaps less extreme than today) will most likely continue for the next days and weeks.

What We Know and What We Don’t

At the moment the actual effects of Brexit on the economy are impossible to predict – we will only know several years from now. Even the timeline of next steps is unclear. The only thing we know is that David Cameron is stepping down as PM (that means succession talks and some internal political uncertainty in the coming months) and that the process of negotiations of the actual EU exit terms will be started in the next days or weeks.

We don’t know what the new UK-EU treaties will look like. There are some possible models, like Switzerland or Norway, but Britain’s situation is unique in many ways. We can also expect the British vote to trigger substantial changes within the EU, as the first reactions of EU representatives have indicated; therefore we don’t know who exactly we will be negotiating with. In any case, this is not the end of trade between the UK and EU countries. The EU can’t afford to not trade with the UK or apply punitive protectionist measures against us.

Where Will the Markets Go Now?

Under these circumstances, no one can predict where stocks or the pound will be one month from now or one year from now. Nevertheless, for a long-term investor, such as someone saving for their pension, these short time horizons don’t really matter. If you invest for 10 years or longer, our view is that you don’t need to fear the impact of yesterday’s vote. Leaving the EU might take a few percentage points from the UK’s GDP and from stock returns, but in the long run it won’t change the trend of economic growth, which has been in place for centuries.

The greatest risk that the Brexit decision represents for a long-term investor is not what the market will do. In any case, it will recover sooner or later. The main risk is the investor acting on emotions, under pressure and without careful analysis of all consequences. The investors who lost the most money in past market crashes such as in 1987, 1997 or 2008 were those who panicked and sold at the worst moment, when it seemed like the economy and the financial system was going to collapse. Those who were able to take a long-term perspective and stayed invested have seen their investments recover and even surpass previous levels.

Our Recommendation

We recognise that this is a momentous event and it will take time to fully digest the implications. For now, it is important that investors maintain their disciplined approach and do not act in haste to sell off their investments. This would only serve to crystallise losses which currently only exist on paper. We recommend that they sit tight unless their goals have materially changed. We also ask them to note that we are not taking this lightly and will be maintaining our portfolio structures under review in accordance with our overall investment philosophy. If we judge that changes need to be made we will provide advice as appropriate and this will be dealt with as part of our normal review process.

 

 

Sell in May and Go Away – Should You?

If you’ve been investing for a while, it is very likely you’ve heard the “Sell in May and go away” adage many times. This time every year, all major financial media outlets publish their own pieces on it. The recommendations in such articles range from “it is nonsense – stay invested” to “it’s true and really improves returns”, often also including the very popular “but this year is different”. Where is the truth? Is “Sell in May” just a myth, or does it have a sound foundation? What should you do?
Sell in May and Go Away Origin
It is not known who came up with it first and when. The saying is based on (perceived) stock market seasonality and it generally means that market returns tend to be higher in the first months of a year and lower in the next months. Therefore, it is better for an investor to sell stocks in May to avoid the weaker period that follows.
Unfortunately, the saying is very vague about the exact timing. Should you be selling on the first day of May or the last? Or the 8th May, for instance? Additionally, if you sell your shares, when should you buy them back?
You will find several different variations and interpretations of the saying. Probably the most popular version is one that divides the year into two halves, one running from November to April (better returns – hold stocks) and the other from May to October (stay out). Others suggest you should stay out of the market until year end. Yet another version is “Sell in May and don’t come back until St Leger Day” (the September horse race, or the end of summer).
Are the Returns Really Different?
Despite its vagueness, the “Sell in May” adage (particularly the May to October version) is indeed based on some statistically significant differences between stock market returns in different parts of the year (seasonality). Various studies have been done working with different time periods and stock indices in different countries. Many of them have concluded that there are parts of the year when average historical returns have been higher and volatility lower than in other parts of the year. The month of May seems to be the dividing line between the good and the bad period, although exact date, as well as extent of the return differences, depends on the markets and years included in the research.
In short, historical data suggests that market returns tend to be weaker in the months starting with May, so the “Sell in May” saying does have some foundation. Does it mean you should sell? No, and there are several reasons why not.
Lower Returns vs. Negative Returns
While much of the research shows that returns tend to be lower in summer and early autumn, that doesn’t mean stock investors are, on average, losing money in that period. Although the market declined in some individual years, if you were holding stocks from May to September, May to October, or May to year end every year in the last 20, 30 or 50 years, you would have made money in the end.
When deciding whether to sell in May or not, do not compare the average or expected stock market returns to those in the other period. They must be compared to the alternative use of your capital.
To Sell or Not to Sell in May
When making the decision, you are comparing two scenarios:
1. Stay invested in the stock market. Your return is a combination of the increase or decrease in stock prices and dividend yield (do not underestimate dividends).
2. Sell stocks, invest the money elsewhere (often a savings account or a money market fund) and buy stocks back at some point. Your return is the interest earned, but you must deduct transaction costs, which can be significant and sometimes higher than the interest earned. Furthermore, buying and selling will have tax consequences for many investors.
Returns of option 1 are less predictable and can be very different in individual years, as they depend on the stock market’s direction. Returns of option 2 are more stable, but with transaction costs and today’s low interest rates they will be extremely low or even negative. It’s the good old risk and return relationship.
If your time horizon is long and the outcomes of individual years don’t matter, option 1 (staying in stocks), repeated consistently over many years, will most likely lead to much higher return than option 2. If your time horizon is short (for example, you are approaching retirement), you should consider reducing the weight of stocks and other risky investments in your portfolio – not just in May, but throughout the year.

When Chasing Interest, Don’t Forget Currency Risk

For many years, interest rates have been extremely low in the UK and most other developed countries. If you are living abroad and your new country’s interest rates are much higher than back home, it is natural to think about ways to capitalise on the difference. The right strategy can significantly enhance your returns, but at the same time there are risks which many expats underestimate or completely ignore.
Do You Want to Earn 0.35% or 14.35%?
At present, central bank rates are at 0.5% in the UK and the US, 0.05% in the Eurozone, and negative in several other developed countries including Switzerland, Sweden and Japan. You can get a cheap mortgage, but you also earn close to nothing on your savings. At the same time, the rates are 6% in South Africa, 7.5% in Turkey, 11% in Russia and 14.25% in Brazil, just to name a few.
Why save at 1% or less in a British bank when you can earn multiples of that just by keeping the funds in a different currency? It makes complete sense, particularly when you are living there and big part of your expenses are denominated in that currency anyway.
Interest Rate Differences and Exchange Rate Changes
You have heard it before: There is no free lunch in the markets. To earn considerable returns, you must take considerable risks. In this case, the risk is that the currency you hold will depreciate and the resulting losses will wipe out or exceed any interest gains. This risk is very real. It happens all the time.
Even with the pound’s current weakness, in the last three years the South African rand has lost 38% against the pound, the Turkish lira has lost 34%, the Russian rouble 56% and the Brazilian real 46%. In spite of their high interest rates, you would have lost money on all of them.
According to an economic theory (named uncovered interest rate parity), when there is a difference in interest rates between two currencies, it is expected (other things being equal, which they never are) that the high interest currency will depreciate against the low interest currency, so the total return will be the same on both. For example, if interest rates are at 0.5% in the UK and 14.25% in Brazil, it is reasonable to expect that the BRL will lose approximately 13.75% against the pound in the next 12 months.
Theory and Reality
In reality, other factors come into play. Sometimes the high interest currency does not depreciate that much and you indeed make money holding it. However, other times it loses much more than “expected”, as seen on the examples above.
The risk of disproportionate adverse moves in emerging currencies is particularly high at times of global liquidity shortage and increased risk aversion, such as in the 2008 financial crisis or the 1997 Asian currency crisis, which spilled over and contributed to subsequent problems in Russia, Brazil and Argentina. The problem with these events is that you never see them coming until it’s too late. Furthermore, even an otherwise stable country’s currency can often be affected only due to market sentiment and its emerging status.
What It Means for Your Finances
The above does not mean you should always keep all your savings in GBP or other major currencies. It means that whenever the currency structure of your income, expenses, assets and liabilities is in mismatch, you are exposed to currency risk. For instance, if you are living in Brazil and saving in BRL, but planning to eventually return to the UK or retire elsewhere, you are to a large extent betting your future on the BRL exchange rate.
Make sure you know what you would do in an adverse scenario, such as a currency crisis, however unlikely that might seem at the moment. Keep at least a portion of your savings in a strong and stable currency, even when the returns don’t look that attractive. It is widely known that rich families in places like China or Russia prefer to keep big parts of their wealth in developed countries, giving up the higher returns they would earn at home. They do it for a reason and that reason is safety and stability.
You can allocate some funds to high-yield currencies and riskier investments, but with the core of your assets, like the pension pot, it should be defence first. Don’t bet your future lifestyle.

Possible Brexit Consequences and Your Portfolio

Whether you support Leave or Remain, you may be wondering how leaving the EU (or staying in) can affect your investments. Will British stocks underperform if the UK leaves? Will the pound continue to be under pressure until the June referendum, but recover if people vote to stay in the EU? Is there anything you can do to prepare your portfolio for either outcome?
The Brexit referendum is a typical example of an event with known timing (23 June) but unknown outcome. Plenty of these occur in the markets on a regular basis, including corporate earnings, macroeconomic data or central bank policy announcements. While this one is obviously of extraordinary significance, the underlying principles of market psychology still apply.
One of these principles is that anticipation can result in as much volatility as the event itself (if not more). In other words, when investors know that something is going to happen, or might happen with a certain non-zero probability, the market often “reacts” before the outcome is announced. In line with the Efficient Market Hypothesis, prices immediately reflect all available information.
The pound has weakened by 9% against the dollar and by 11% against the euro in the last 3 months. It seems like big part of the damage has already been done. Will it depreciate further? It is impossible to predict.
When anticipating an event, sometimes the market overshoots and then corrects, making a counterintuitive move when the actual outcome is finally known (like the pound strengthening after the referendum even if Leave wins). The saying “buy the rumour, sell the fact” comes to mind. Sometimes it’s the opposite. Other times it’s completely random. No one can tell before it happens.
With the above being said, there are two things we consider highly likely:
Firstly, until the June referendum we will probably continue to see increased volatility in the pound’s exchange rate (saying nothing about the direction). As the first days have confirmed, the debate will be heated. New questions and new fears will arise. Both camps will achieve small victories and suffer small defeats. The perceived probability of leaving the EU will change as new opinion polls will come out.
Secondly, given the high profile and non-stop media coverage of the matter, the economic significance and consequences of Brexit are probably exaggerated at the moment by both the Remain supporters (doom and gloom if we leave) and the eurosceptics (prosperity guaranteed if we rid ourselves of EU bureaucracy).
Contrary to what it may seem, the world has not come to a standstill, waiting for the UK to decide. There are other events and other factors which will continue to influence the economy, the stock market and the currency, before and after the referendum. Some of them will probably have much greater effects than Britain leaving the EU – possible candidates include oil price (the FTSE is energy heavy), interest rates, slowdown in China or the US, wars (e.g. Ukraine, Syria) getting worse and spilling over, or shocks in the financial sector. This time last year, it was Grexit, not Brexit, dominating the headlines. The fact that no one talks about Greece at the moment does not mean that the sovereign debt problem (in Greece and elsewhere) has been resolved. It can strike back at any time and hurt British banks and the economy even if we are already out of the EU.
The above does not mean that consequences of a possible Leave vote will be negligible or non-existent. However, they are too complex for anyone to understand and forecast. We don’t know the referendum outcome. If it’s Leave, we don’t know how the future arrangement will look (in any case, the UK will not cease to trade with Europe). Most importantly, the global economy and external factors will definitely not remain constant, further complicating any predictions.
Therefore we believe that avoiding panic and sticking to your long-term investment strategy is the best course of action. Remember that trying to outsmart and time the market rarely leads to superior results.

Bear Market Coming? Stick with Your Strategy

Following a multi-year rally, 2015 wasn’t particularly successful in the global markets and, so far, the start of the new year hasn’t been any good either. The UK’s FTSE 100 index is below 6,000, lowest in more than three years. It’s times like this when various doomsday predictions start to appear, warning against events “worse than 2008”, using words such as “crash” and “meltdown”, and pointing to factors such as rising interest rates, growing political tensions, China, rising commodity prices, falling commodity prices and many others.
The truth is that no one really knows what is going to happen. Not the TV pundits, not the highly paid bank strategists and stock analysts, not even the Prime Minister or the Bank of England Governor.
That said, when you have significant part of your retirement pot invested, it is natural to feel uneasy when you hear such predictions, especially if they come from an analyst who got it right last time and correctly predicted some previous market event (he was lucky).
When the markets actually decline and you see your portfolio shrinking in real time, the concerns may become unbearable. Fear and greed get in charge, both at the same time. It is tempting to think about selling here and buying the stocks back when they are 20% lower a few months from now. Easy money, so it would seem. Nevertheless, that would be speculating, not investing. The problem with the financial industry (and the media) is that these two are confused all the time.
Time in the Market, Not Timing the Market
While some people have made money speculating, academic research as well as experiences of millions of investors have shown that it is a poor way to save for retirement. When a large number of people take different actions in the markets, some of them will be lucky and get it right purely due to statistics (luck). However, it is extremely difficult to repeat such success and consistently predict the market’s direction with any accuracy.
In the long run, the single thing which has the greatest effect on your return is time, not your ability to pick tops and bottoms. The longer you stay invested in the market, the more your wealth will grow. You just need the patience and ability to withstand the periods when markets fall, because eventually they will recover and exceed their previous highs.
Time Horizon and Risk Tolerance
The key decision to make is your risk tolerance – how volatile you allow your portfolio to be, which will determine your asset allocation. While personality and other personal specifics come into play, the main factor to determine your risk tolerance is your investment horizon. The longer it is, the more risk you can afford and the more volatility your portfolio can sustain. If you are in your 40’s and unlikely to need the money in the next 20 years, you should have most of your retirement pot in equities. If you are older and closer to retirement, your portfolio should probably be more conservative, because you might not have the time to wait until the markets recover from a possible crash. It is important to get the risk tolerance and the asset allocation right (an adviser can help with that) and stick with it.
How to Protect Your Portfolio from Yourself
Because the above is easier said than done, here are a few practical tips how to protect your retirement pot from your emotions and trading temptations:
1. Have a written, long-term investment plan. It is human nature to consider written rules somehow harder to break than those you just keep in your head. It is even better if you involve your adviser to help you create the plan. Not only is an adviser better qualified and more experienced in the investment process, but another person knowing your rules makes them even harder to break.
2. Do not check fund prices and the value of your portfolio every day. This doesn’t mean that you shouldn’t review your investments regularly. But the key is to make these revisions planned and controlled, rather than emotion-based. You will be less likely to make impulsive decisions, which more often than not are losing decisions.
3. Maintain an adequate cash reserve. This should be enough to meet any planned short-term expenditure and also provide a reserve for unexpected expenses. It will help you avoid the need to encash investments at a time when investment values are low.

Would you like to discuss this article with an adviser?

The Seven Roles of an Advisor

What is a financial advisor for? One view is that advisors have unique insights into market direction that give their clients an advantage. But of the many roles a professional advisor should play, soothsayer is not one of them.

The truth is that no-one knows what will happen next in investment markets. And if anyone really did have a working crystal ball, it is unlikely they would be plying their trade as an advisor, a broker, an analyst or a financial journalist.

Some folk may still think an advisor’s role is to deliver them market-beating returns year after year. Generally, those are the same people who believe good advice equates to making accurate forecasts.

But in reality, the value a professional advisor brings is not dependent on the state of markets. Indeed, their value can be even more evident when volatility, and emotions, are running high.

The best of this new breed play multiple and nuanced roles with their clients, beginning with the needs, risk appetites and circumstances of each individual and irrespective of what is going on in the world.

None of these roles involves making forecasts about markets or economies. Instead, the roles combine technical expertise with an understanding of how money issues intersect with the rest of people’s complex lives.

Indeed, there are at least seven hats an advisor can wear to help clients without ever once having to look into a crystal ball:

The expert: Now, more than ever, investors need advisors who can provide client-centred expertise in assessing the state of their finances and developing risk-aware strategies to help them meet their goals.

The independent voice: The global financial turmoil of recent years demonstrated the value of an independent and objective voice in a world full of product pushers and salespeople.

The listener: The emotions triggered by financial uncertainty are real. A good advisor will listen to clients’ fears, tease out the issues driving those feelings and provide practical long-term answers.

The teacher: Getting beyond the fear-and-flight phase often is just a matter of teaching investors about risk and return, diversification, the role of asset allocation and the virtue of discipline.

The architect: Once these lessons are understood, the advisor becomes an architect, building a long-term wealth management strategy that matches each person’s risk appetites and lifetime goals.

The coach: Even when the strategy is in place, doubts and fears inevitably will arise. The advisor at this point becomes a coach, reinforcing first principles and keeping the client on track.

The guardian: Beyond these experiences is a long-term role for the advisor as a kind of lighthouse keeper, scanning the horizon for issues that may affect the client and keeping them informed.
These are just seven valuable roles an advisor can play in understanding and responding to clients’ whole-of-life needs that are a world away from the old notions of selling product off the shelf or making forecasts.

For instance, a person may first seek out an advisor purely because of their role as an expert. But once those credentials are established, the main value of the advisor in the client’s eyes may be as an independent voice.

Knowing the advisor is independent—and not plugging product—can lead the client to trust the advisor as a listener or a sounding board, as someone to whom they can share their greatest hopes and fears.

From this point, the listener can become the teacher, the architect, the coach and ultimately the guardian. Just as people’s needs and circumstances change over time, so the nature of the advice service evolves.

These are all valuable roles in their own right and none is dependent on forces outside the control of the advisor or client, such as the state of the investment markets or the point of the economic cycle.

However you characterise these various roles, good financial advice ultimately is defined by the patient building of a long-term relationship founded on the values of trust and independence and knowledge of each individual.

Now, how can you put a price on that?