Tag: Financial Markets

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

Now’s not the time to play ‘financial chicken’

Sometimes it’s good to be the odd one out!

The election is over, now let the dust settle

Finally we have the outcome and a new strong direction for the UK, with Brexit now happening in the way that Boris Johnson has planned. There will be international reactions to the new political landscape and the markets will no doubt respond too. In fact, at the moment the exit poll was announced Sterling rose significantly; and we can expect to see further fluctuations across the board in the UK markets. Which is why, whatever way you voted, I’d like to just focus your attention on your finances and what you should and shouldn’t do next. 

Psychologists tell us that we have been hardwired over the last 100,000 years to behave the way we do. With most of these behaviors being based on primal instincts that determine our survival as individuals and as a species. So in many ways, these behaviors are so deep routed at a biological level, we don’t stand much of a chance of avoiding them as individuals. That is of course, if they are not pointed out and guarded against.

The modern world really is an extremely new phenomenon, especially when we look at it through the lens of evolution. The vast interconnections and the exchange of up to the minute information and ideas are truly phenomenal. So have some sympathy for that part of your brain that has been hardwired to live in a world that lasted for around 98,000 years and now no longer exists; and never doubt the influence it still has over you and your finances!

Here’s how a caveman still influences your decision-making

We all carry around these hardwired modes of behaviour; and one that may come to the forefront in the next couple of months is what psychologists call ‘The Bandwagon Effect’

There is an incredibly powerful compulsion to follow the herd. It’s been bred into us at the very base level of our existence; and in uncertain and stressful times, it comes right to the front of our thinking. That’s because for tens of thousands of years, belonging to and conforming to a group was a very successful strategy for survival. Staying with the group is far better for survival than going it alone. Hence, over thousands and thousands of years the desire to follow the herd has been bread into all of us over time – and is now a fundamental human instinct. 

How many times have you fallen for the appeal of a busy mediocre restaurant verses a fabulous empty one saying “Let’s eat here, it looks full so it must be good”?.. It’s the Bandwagon Effect in full swing.

When the wheels come off and that impacts your finances

An excellent and extreme example of The Bandwagon Effect causing financial problems was laid out in the dramatic rise and crash of Bitcoin. That particular bandwagon was one that people couldn’t get on fast enough, despite common sense telling them that it wouldn’t last. For the majority of ordinary investors, they bought Bitcoin at the height of its value only to watch the value plummet. 

Whilst Bitcoin is an extreme example, I use it to illustrate the Bandwagon’s grip on sane minds. So my words of caution are aimed at the post-election markets in general, over the short-term.

March to the beat of your own drum

Over the next few weeks or months the markets are going to react to the first quarter of the new Government. That may well create fluctuations and the odd perceived stampede toward the Bandwagons. My advice would be to bide your time and wait. 


Think about theold adage ‘If you see a bandwagon, it’s already too late’

Markets hate uncertainty and have been reacting to the political deadlock that we have been living with through the post Brexit Referendum. 

However, now is the time for the markets to settle again. It’s certainly not the time to take peer-pressured decisions on investment acquisitions or disposals. If you spot an opportunity whose value is created by a sudden influx or departure of groups of investors, please think again. Remember that bandwagons often artificially alter a market for the short term. So get some impartial advice and consider your options calmly and pragmatically. Please bear in mind that the powerful drives to follow the herd have been with us for over 100,000 years and have served us incredibly well. However, they are your worst enemy when it comes to the financial markets.

Unleash your inner Spock!

I’m not sure if there is such a thing as The Bandwagon Effect on Vulcan. However, I would say that approaching the financial markets with a Vulcan like emotionless clarity, and a determination not to get carried along with the crowd, is the only way to overcoming the possible pitfalls of market hysteria. 

The markets are probably ahead of you anyway

Most of the serious financial markets have had any political upheavals already costed into them. So what you will be witnessing in any fluctuations is merely a settling of the market.

Also, don’t forget that the markets are now interlinked throughout the world. So, whilst the UK General Election may seem incredibly important to us, to the international markets it’s just a small bump in a very long and well-established road – and nowhere near as significant to performance than many of us believe.

Don’t just take our word for it though – talk to us too!

If you have any questions or worries regarding the current or future financial and investment markets, then pleasecontact us at Bridgewater Financial Services where we will be delighted to help guide you through your individual options and strategies.

Market Volatility a lesson from NASA

Don’t Take A Giant Leap

Back on the 20thJuly we celebrated the 50thanniversary of the moon landings. I was totally in awe of Neil Armstrong, who took over the piloting of Eagle, from the computer once he noticed that the preselected landing place wasn’t going to be suitable.

Both he and Buzz Aldrin calmly worked together, whilst the vital fuel that would get them home was used to pilot Eagle over the rocky surface to a safe point of touchdown.

It was this calm, panic free approach that saved their lives, the mission and the hopes of the whole planet.

They trusted what they knew to get them through what must have been a terrifying descent. But they stuck to the plan established by NASA and they achieved what they’d all set out to accomplish.

I can’t help thinking that this idea of sticking to a plan, no matter how appealing it may be to abandon it, is a lesson for us all in the current investment markets, as we go through periods of increased volatility.

I say this because, unlike Apollo 11, we are not actually in uncharted territory. History shows us that volatility is a normal function of the markets.

Our long-term journey as investors will have highs and lows. However we should no more emotionally jump from a growing market than we should from a declining one. As reacting emotionally to market volatility could be far more harmful to your portfolios performance, than the market drop itself.

Here’s something to remember

This interesting graph showing the Dimensional UK Market Index returns by year (from 1956 – 2018*), should help put things in some perspective. As we can see, the markets have provided positive returns for investors for 47 of the 62 years shown (that’s 75% of the time).

So whilst it is sometimes difficult to remain calm during a market decline, it is however important to remember that volatility really is a normal part of investing.

Investors, who do seem to be able to time the market, usually do so with more luck than judgment. With the general wisdom suggesting that the big returns in the total performance of individual stocks over time, are usually produced in a small handful of days.

As investors can never really accurately predict when these days will come along, the prudent strategy would seem to suggest that remaining invested during these periods of volatility, rather than abandoning the stocks, means that investors won’t be on the sidelines on the days when the strong returns occur.

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In a changing market, knowledge is power

Hear are the most frequently investment questions I get asked in times of volatility:

I’ve been looking at funds with strong past performances; can I assume that they will do well in the future?
Whilst some investors are known for selecting mutual funds based on past returns, research suggests that most US mutual funds in the top 25% of previous five-year returns did not maintain that ranking in the following five years.

So the short answer would be: No, past performance is just that, history. It offers little insight into possible future performance.

Is being a successful investor all about out-thinking the market?
The short answer is to let the markets do the thinking for you. It’s a fair assumption that people want a positive return on any capital they invest. Over time history shows us that the equity and bond markets have provided growth of wealth that has more than offset inflation. So instead of fighting the markets and trying to out-think them, let them work for you. Remember, financial markets reward long-term investors.

Should I think of stepping out of the UK and exploring international investing?
It’s a good question. We all know that diversification can help reduce risks and that diversifying only within your home market limits that benefit. Not only does global diversification extend your investment opportunity; but by holding a globally diversified portfolio, you are better positioned to seek returns wherever they occur.

To give you an idea of the opportunity, according to MSCI UK and ACWI Investable Market Index (IMI), the UK is one country with 364 stocks; whilst the global opportunity for investments ranges across 47 countries with 8,722 stocks.

Will constantly changing my portfolio help me achieve better returns?
As it’s almost impossible to know what market segments will outperform the others, it’s better to avoid unnecessary changes that can be costly.

Can my emotions affect my investment decisions?

There is a vast body of psychological research that shows that we struggle to separate our emotions when investing our money. Just remember that markets go up and down. So kneejerk reactions are usually poor investment decisions.

Every time I hear the news, I’m tempted to make changes to my portfolio,
is that a good idea?

Day to day commentary can make us question our investment discipline. Some news will stir anxiety about the future, whilst other news tempts us to chase the latest faddy investments.

My advice is to always consider the source and to keep your long-term objectives in focus.

I feel like I need to do something – so, what should I be doing?

Get another perspective on things, especially and independent and expert one. Talk with your financial adviser who can help you focus on actions that add value.
Sticking to actions that you know you can control can certainly lead to a better investment experience.

  • Create an investment plan to fit your needs and risk tolerance.
  • Structure a portfolio along the dimensions of expected returns.
  • Diversify globally.
  • Manage expenses, turnover, and taxes.
  • Stay disciplined through market dips and swings.

Stay on mission

Neil and Buzz didn’t panic. They didn’t cancel the mission, because things looked tough. They trusted in the plan. They stuck to a pre-agreed course of action and rode out the challenges that faced them on the descent to their ultimate goal.

I totally appreciate that market volatility can be a nerve-racking time for investors. However, reacting with your emotions and altering long-term investment strategies could prove more harmful than helpful.

Sticking to a well-thought- out investment plan, ideally agreed upon in advance of these periods of volatility, you’ll be better prepared to remain calm during periods of short-term uncertainty.

As always, if you have any questions regarding your current or future investment strategies, then please contact us at Bridgewater Financial Services where we will be delighted to help.

* Past performance is not a guarantee of future results.