Ignore the siren songs of the markets

Don’t keep checking your portfolio. Dr Benjamin Holdsworth explains the madness of markets.

As an investor, it is generally a good idea to ignore what is going on in your portfolio most of the time. At the very least, it can be distracting and, at worst, it can be a source of unnecessary anxiety.  

That advice is as applicable today as it ever was. The markets feel like they have gone a bit mad.  

Since the start of the pandemic, and despite a 25% or so fall in late February and early March 2020,  global markets – developed and emerging combined – have gone up by more than 10%.

Some sectors and companies have delivered far higher returns. For example, the ‘FAANGs’ – Facebook, Apple, Amazon, Netflix, and Google, all beneficiaries of global lockdowns – have risen collectively by 45% since the pre-pandemic market high. 

In May 2020, Elon Musk, Tesla’s chief executive, tweeted that its share price was too high and it fell 10% overnight to $80, yet Tesla’s share price has, since then, grown almost ten-fold to $804 on 10 February 2021.

Fair prices? 

Today Tesla’s market capitalisation is now larger than the next nine global car manufacturers combined, including Honda, VW, Renault-Nissan and GM. We have not even mentioned Bitcoin.  

Are these fair prices or are they overvalued? 

The rational investor would say that the market is simply looking beyond the pandemic to a time of global recovery and a more normal world and that the market is the best judge of prices. 

Yet some investors may have concerns that markets are in a bubble and question whether they should reduce their equity holdings. 

Others may see the extraordinary returns from certain sectors and companies and feel a sense of FOMO – fear of missing out – that they are not more heavily invested in tech stocks or Tesla, for example.  

The problem is that the markets may be right . . . or wrong. The one thing we know for sure is that it is impossible to know which with any certainty and the evidence tells us that even professionals have little ability to time entry into or out of stocks, sectors or markets successfully.  

Mad markets

Markets can remain seemingly ‘mad’ for a long time. As John Maynard Keynes famously once said: ‘Markets can remain irrational longer than you can remain solvent.’

Sensible investing is about remaining highly diversified across markets, sectors and companies to avoid absolute losses and to try to smooth out returns as much as possible over time. To many, that is a great comfort and allows them to sleep at night.  

Reap rewards

Rebalancing periodically and reminding yourself that you do not need to cash in your equity assets in the near term is worthwhile. 

It may not be as exciting as punting – which is what it is – on Tesla or Bitcoin, but it will reap its rewards over time. 

Remember, too, that being diversified means that you will benefit from being in the companies and sectors that do well. 

In 2020, the developed global stock markets returned around 12% in terms of GB pounds. Of this 12%, half – or an absolute 6% – of this return was attributed to the top ten stocks. The FAANGs alone represented 30% – that is to say, around 4% of the 12%. That is surely enough exposure for most.  

Stick with the plan and try not to look at, or think about, your portfolio too much.

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 decision.
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.