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Oct
2019
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How to avoid investment blunders during volatility

Who could have predicted that three years after the Brexit referendum, Boris would be Prime Minister, apparently lying to the Queen, and political chaos would be the new norm? I’m hesitant to say much more, as in the short time it takes to publish this blog, Hugh Grant might actually be dancing through 10 Downing Street.

It all goes to show, no matter what you think the future is likely to hold, life is largely unpredictable. The same could be said for investment volatility, and, whilst political uncertainly is a good analogy, it can also directly influence market performance. Whether it’s as close to home as attempting to leave the EU, or the ongoing US-China trade war, economic uncertainty and market volatility can lead to irrational investment decisions.

Stick to your guns

Dalbar, who study investor behaviour and market returns, found that ‘average’ investors consistently achieve below-average returns. In fact, they found that over a 20-year period the S&P 500 Index (the US equivalent of the FTSE 500) averaged 9.85% a year, whilst the average equity fund investor returned just 5.19% – which begs the question, what went wrong?

In short, emotive decision making.

Not acting on fear can be challenging. When markets fall the temptation to sell and hold cash can be strong. In reality, all you will have done is make the loss real with no opportunity to recover. Selling in a downturn is quite literally the worst thing you could do.

Research from Schroder’s found that on average people stay invested for 2.6 years before moving their money elsewhere or cashing in. That’s simply too short – the generally accepted recommendation is a minimum of five years. You must remember why you’re investing in the first place. It’s very likely to be towards a long-term goal, like retirement. History demonstrates that over time markets ultimately recover.

In the last quarter of 2018, the MSCI World Index (which is a broad global equity index that represents large and mid-cap equity performance across 23 countries) fell by 13.9% – the 11th worst quarterly decline since 1970. Schroder’s research went on to find that during this period only 18% of investors stuck to their original financial plan!

  • 35% took more investment risk
  • 36% moved into lower-risk investments
  • 20% moved into cash, locking in the loss

The tinkering didn’t pay off. More than half of investors said they had not achieved the returns they wanted over the past five years. Interestingly, many attribute their own action or inaction as the main cause of failure. This does show that, with hindsight, people do recognise that deviating from a long-term plan can have a detrimental financial impact.

Missed opportunities

Trying to manage investment risk and returns isn’t just about volatility and losses. If you get spooked and sell your investment, missing the best recovery days can have a significant effect on your savings.

Time in the market is much more important than trying to time your investment. Research from J.P. Morgan actually found that over 20 years between 1999 and 2018, if you missed the top 10 best days in the market, your overall return would be cut in half! That’s a significant difference considering just 240 hours of missed returns.

Skin in the game

Your financial planner has a vested interest in the performance of your portfolio and your financial wellbeing. It’s our passion, responsibility and livelihood. Other influences such as the media don’t have any skin in the game. There are no repercussions for them if their ‘advice’ is wrong or if the information they present is misleading.

I’ve written before about the negative impact of sensationalist media and financial pornography. Negative headlines, designed to sell papers and get more clicks online, always increase when markets are volatile. Which, as we know, is a temporary situation.

Talk to your financial planner

The financial benefits of financial advice have been proven in the past. Research produced by ILC-UK found people who receive financial advice accumulated significantly more liquid financial assets and pension wealth than unadvised people. They compared those who received financial advice between 2001 and 2007 with those that didn’t, revisiting them again between 2012 and 2014.

On average, affluent people accumulated £12,363 (17%) more in liquid financial assets and £30,882 (16%) more in pension savings than the non-advised group. Having a financial plan aligned to your personal circumstances and goals, that is regularly reviewed, absolutely pays off.

Finally, consider that doing nothing is likely to be better for your long-term financial security than making rash investment decisions. Have a plan, stick to it, and don’t get distracted by the noise. If you’d like to discuss your portfolio’s performance or exposure to volatility, don’t hesitate to get in touch.

The value of your investment can go down as well as up and you may not get back the full amount invested

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