Gazing ahead also involves looking back
With a financial spring clean in the offing, Dr Benjamin Holdsworth explains why your investments would have fared better if left alone.
Last year will certainly go down in history as a momentous one: with the tragedy that is Covid-19, the painful global downturn that has ensued, the curbs on personal freedom and the end of one of the most divisive presidencies in the US, carrying the headlines.
What will almost certainly be forgotten as a footnote to the year is the fact that global equities actually finished the year slightly up on where they started.
Yet that is to belie the still raw memory of some of the most severe daily and weekly market falls – and subsequent rapid rises – that investors have ever experienced.
Such moments in markets can be discombobulating and, when emotions kick in, can lead to poor decision-making.
Risky behaviour
Being tempted to act on market falls – or the perceived prospect of market falls – is extremely risky and likely to harm your portfolio. This is where good advisers will act as behaviour coaches – to stop knee-jerk reactions which will have a detrimental effect on your long-term goals.
For example, in 2020, markets fell around 25% but returned to above their starting point. In 2016, which saw an awful start to the year and the Brexit vote, the markets ended up by almost 30%.
In fact, if we look at world equities from 2011 to 2020, we can see that ‘just hanging in there’ resulted in an annualised return of over 11%, which meant that investors doubled their assets every seven years or so. That is a great outcome and no action was needed.
Supposed actively managed ‘absolute return’ funds, which promise positive returns above cash over two- to three-year horizons, demonstrate how difficult second-guessing markets is.
A recent Financial Times headline ‘Absolute return funds on course for worst ever annual outflows’ says it all. Some funds lost more than 10% last year. Sometimes it can pay to do nothing.
Active managers may try to position portfolios to reflect world events, but crystal ball-gazing is hard to do.
Late last year, the prospect of a vaccine for Covid-19 sent airlines, banks and energy companies soaring and Zoom and other ‘lockdown’ benefiters, such as Ocado, down.
Short-term noise
Random events and the release of new information moves the market’s view of cash flows and discount rates, resulting in the movement of stock prices.
Guessing against randomness is hard, but taking on the known risk that equity returns are far less certain than holding cash, rewards investors who ignore this short-term noise and focus on the long-term.
If you are still looking back on 2020, it might be best to leave your thoughts about the markets in the footnote where they belong. Many other things were far more important.
Dr Benjamin Holdsworth (right) is director of Cavendish Medical, specialist financial planners helping consultants in private practice and the NHS
The content of this article is for information only and must not be considered as financial advice. Cavendish Medical always recommends that you seek independent financial advice before making any financial decisions.
Levels, bases of and reliefs from taxation may be subject to change and their value depends on the individual circumstances of the investor. The value of investments and the income from them can fluctuate and investors may get back less than the amount invested.
