When we work with clients to build their investment portfolios, we make sure that they are clear about what is 'long-term' money, which is unlikely to be needed for at least five years or more. Ross Mackie explains that the main reason that we make this distinction is simple; despite what anyone else says, no-one knows for sure where investment markets are heading.
Once we've identified our clients' shorter-term goals and income requirements, we can begin to consider how to obtain superior long-term returns that will give them the financial security they require over many years to come. This means making use of investments that are likely to fluctuate in value, whether they be shares, property or bonds.
The next question is when to invest. Should we try to judge when markets are 'high' or 'low', and base our purchase decisions on that judgement?
Timing the Market
Attempting to buy into market peaks and troughs to make extra gains sounds attractive as an idea, and many people spend disproportionate amounts of time engaged in it. The problem is that markets never behave in the way you want them to, and successfully identifying the highest and lowest points – known in the trade as ‘timing the market’ - is a game fraught with difficulty and potential disappointment.
No-one can “time the market”. Indeed, if I knew how to time the markets successfully, I’d be on a beach somewhere in the Bahamas sipping rum cocktails because I’d have found the key to riches.
We don’t try to manage our clients’ money in that way. Our experience has demonstrated that the best way to make a good return on investments is to give them “time in the market” and stay invested over many years.
The Lockdown reaction
The coronavirus crisis is a great example of this. I heard stories of investors who panicked and blindly sold everything as the virus contaminated investment markets, dragging prices down to much lower levels. Instead, we encouraged clients to hold their nerve. As part of a well thought out financial plan, our client’s monies are only invested in fluctuating assets if they have the investment time horizon that means it is suitable to do so. Any monies that are required to fund short-term expenditure or income over the next few years will have been retained in cash.
Thanks to this planning, none of our clients were forced sellers during the wild swings in prices that occurred as the lockdown took hold. Instead, they had time on their side before additional capital was required and this gave them the luxury of being able to sit tight and allow their investments time to recover.
How did this work out in practice?
I’m writing this in mid-May, and looking back over the last 5 months to December. After a strong rise in values through 2019, markets fell by over third in March, giving investors ample cause to be worried. The low point for our client’s portfolios was on the 19th of March, and I took calls from people wanting to sell at that time. I managed to talk them off the ledge, and no-one jumped.
In the eight weeks since then, portfolios have recovered significantly, rising in value by over a fifth. Any investors who went against our advice and sold their investments to cash at that point would have missed out on this strong rebound. It is worth noting that most of this recovery had occurred by the 9th of April, just 19 days after the low point. This clearly highlights how difficult it is to time the market.
Those investors are still showing falls in value in the portfolios over the last year, but confidence is returning, and values are rising again. Of course, we could be in for further distress in markets, but history demonstrates that in the long term staying with your investments remains the way to create long term good returns. Even at the low point, our clients had experienced around 5% a year average growth or more over the last 10 years, at a time when interest rates on cash deposits have been at their lowest ever.
Advisers Add Value
There is plenty of evidence to demonstrate that investors working with an adviser get better long term returns than those going it alone. The reason is not necessarily because of any higher skill in picking investments, although this is a factor, but primarily because the adviser helps their client to avoid making foolish decisions in times of high drama and emotion. Having someone to talk to who helps you to refocus on your goals, remind you of stock market history, and hold your hand (even from two metres away!) through the turmoil is literally worth its weight in gold.
Stick to the Process
At Chesterton House, we have a consistent investment philosophy and process that feeds into all of our client portfolios. The key aspects are:
We take a long-term view, analysing the fundamentals rather than being swept up by short-term market ‘noise’
We look for investments that can grow over time, and we let time do the heavy lifting for us
We look at real returns after the effects of inflation, fees and tax
We don’t let emotions or cognitive biases cloud our judgements
We believe in designing portfolios that have the highest potential returns for a given level of risk
Most importantly, we begin the process by asking what’s really important to you, and we make sure we fully understand your goals and the time frame for your financial plan to accomplish them. By doing this, it should become clear that the goal is not to “beat the market” but rather to achieve your personal goals.
The diversified portfolio of investments that we recommend have historically proven to provide greater returns than those who try to jump in and out of the market at what they believe are the lows and highs. But more importantly, our advice has allowed hundreds of clients to achieve thousands of goals. Keep them coming!
Trainee Financial Planner
Woodgate Financial Planning, an appointed representative of Chesterton House