James Johnsen addresses the key questions raised by investors during times of economic and market challenge.
In volatile times like these, it can be difficult to know how to react financially. Should you invest? If so, where should you invest? Are there still opportunities to be found?
The first thing to state is: ignore the ‘white noise’ of current newsflow, where the emphasis is inevitably on the negative and the sensationalist.
Whether Putin persists, Trump wins, inflation fails to slow, and interest rates keep on rising is, in one sense, irrelevant. The over-riding priority is to establish a sensible long-term strategy for your money and circumstances. The better the groundwork put into this, the better the outcomes in terms of fulfilling a tax-efficient plan that dovetails into a family's, trust's or pension fund's long-term plans.
Once this strategy has been established, clients then often ask whether ‘now’ is the right time to invest. The short answer to a genuine long-term investor who has done this strategic groundwork is an unequivocal ‘yes’.
Or in other words, waiting for optimal investing conditions is a fool’s errand and – at best – can involve much wasted time and lost opportunity ‘out of the market’. The fundamental importance of ‘time in the market’ rather than ‘timing the market’ is clear to see when looking at total return graphs for portfolios; that is, those that reflect the powerful compounding effect of reinvestment of dividend and income returns, what Albert Einstein referred to as the ‘eighth wonder of the world’.
That is not to say that tactical timing opportunities cannot be seized: periods of unusual volatility or simply ‘bad news days’ can often be the fund manager’s best friend when looking to establish positions in stocks or funds being targeted for inclusion. But rather than chasing these ephemeral timing opportunities, the priority should be, first, to build out the more defensive allocations - which are usually the ones that generate a steady income and therefore need to be initiated soonest – and then to ‘average' cash into the more volatile (i.e. equity-focused) allocations over whatever might be an appropriate period of weeks or months for each particular stock, sector and market. This is in order to ‘smooth’ the effects of volatility. Tactical short-term timing wins, while attractive to bag in the short-term, soon get ‘played out’ over the long term. The key focus is to get your money into the market and establish that vital investment ‘traction’ – a large part of which is the process of ‘income harvesting’ – properly underway.
So, in brief summary, ‘now’ is always the right time to invest.
While you have to launch your boat into the sea to begin your journey, the course you plot and the amount of canvas you decide to hoist up your mast is a much more skilled decision which involves a proper understanding of investment risk.
At the start of our investment process, we stress the setting of risk parameters to align not just with a client’s tolerance, or willingness, to embrace some investment risk in pursuit of returns better than can be obtained from leaving money on deposit at the bank, but also with his capacity for risk. This is something that is both quantitative and qualitative and takes a little time to explain and understand. But in the ultimate analysis, it is about avoiding unexpected shocks and meeting reasonable expectations.
If the essential risk part of the strategy is set and understood, then there will rarely be an occasion to change it as the risk level will have ‘bracketed’ the likely range of outcomes but not necessarily the catalysts for the extremes envisaged. In other words, we can’t control what is going to happen in this sometimes worryingly unstable world, but what we can do is limit your exposure to the more risky and volatile elements of the market according to the risk parameters you set us. And since this is quantifiable and measurable, we can be held accountable if risk levels are exceeded.
In short, the investor can remain in control whatever the market conditions.
For a while now, our fund managers have focussed on ‘quality’ across the spectrum of asset classes. In the world of rising interest rates, the ability of governments, corporates - and ultimately, individuals - to service and pay down debt is crucial. Stocks with strong defensive capabilities, those with strong brands, low levels of debt, high barriers to entry and therefore dependable earnings profiles are the key to the fundamental preservation of capital over the long term. In other words, companies that will ride out the stormiest weather best.
Similarly, managing liquidity and counterparty risks are important parts of the investment piece that sometimes get forgotten until too late. But finding yourself locked up in a fund that has been ‘gated’ or having traded with a counter-party bank, trading platform or stockbroker who has run into trouble can lead to problems that not only consume returns but can involve a lot of time, uncertainty and hassle.
In this context, Nathaniel Rothschild's famous quip made in 1815 still holds true: “invest at the sound of canons, sell at the sound of trumpets”. For those without Rothschild resources (or information), this approach needs to be slightly tempered, and there is, of course, a balance to be struck between taking unnecessary risks and sitting on sidelines and missing out. Playing the long game should always be the objective. Bad news, political shocks, ‘black swan’ events and market volatility are normal. But the boring, sensible advice always holds true – patience and a focus on the preservation of capital will pay off in the end.
The contents of this article are for information purposes only and do not constitute advice or a personal recommendation. Investors are advised to seek professional advice before entering into any investment arrangements.
Please also note the value of investments and the income you get from them may fall as well as rise and there is no certainty that you will get back the amount of your original investment. You should also be aware that past performance may not be a reliable guide to future performance.