This week I thought I would share with you a blog written by Tim Hale of Albion Strategic Consulting. Tim is engaged by Carpenter Rees as a consultant and has helped design and develop the investment strategies we put in place for our clients. Tim is well known for his investment knowledge and is author of the book Smarter Investing.
Modern life provides us – some would say swamps us – with so much news, information and punditry, which focuses on the here-and-now, that it is easy to be overwhelmed with the feeling of doom and gloom. The list of things to concern us is long and worrisome; Donald Trump leading the free world, a nuclear-armed North Korea; an increasingly fractious Brexit process and looming cliff-edge, to name a few.
The natural extension of this is to worry about what the impact of all this uncertainty will have on your portfolio and in turn, on your future wealth and expenditure goals. The first mistake is to believe that the world is falling apart around our ears. It most certainly is not. The second mistake is to think that the portfolio needs to be repositioned to mitigate these events. There are six key reasons why portfolio tinkering is unlikely to be a sensible course of action.
Reason 1: today’s ‘unprecedented’ turmoil is no different to how it’s always been
Today’s worries dominate our thinking; but can you remember what you were worrying about a year ago, or two years ago? Probably not. It has ever been thus. Take a look at the chart below. The overwhelming take-away is to acknowledge the relentless upward trajectory of purchasing power for those patient enough, and disciplined enough, to stay the course.
Figure 1: The relentless growth of purchasing power, despite World events
Source: Albion Strategic Consulting
Reason 2: bad news sells – so don’t ignore the underreported good news
We are all aware that bad news sells. For example, the Office for Budget Responsibility (OBR) delivered a ‘gloomy’ forecast for growth of ‘only’ 1.4% for 2018. Yet, the UK economy is still growing; remember too that this slow down comes after a period of growth that has outstripped much of the developed world – particularly the rest of the EU – for the past few years. It is not all bad news.
Reason 3: the danger of conflation of ‘what ifs’
The human mind likes stories and in themselves these stories may lead to what appear to be rational outcomes on which some action, or another, could or should be taken. What we often fail to realise is that the seemingly logical outcome is highly unlikely; we have failed to multiply the probabilities of each sequential outcome together. Think hard about the stories you read and hear.
Reason 4: the futility of futurology
Futurology is the financial markets’ version of astrology. There is a huge industry out there from the IMF and the UK’s Office for Budget Responsibility (OBR) to investment banks, academics and BBC reporters all peddling their own view of the future. These futurologists have one thing in common; they are nearly always wrong in their predictions, and are rarely held to account for their poor forecasts. Take forecasts with a pinch of salt.
Reason 5: the framing of data
As we all know, data is used to score points in support of the data-user’s viewpoint. Be aware that simple statements of fact can be both very influential and misleading.
Reason 6: the news is already in market prices
It is normal to be worried about the potential impact of what is going on in the world and how this will affect markets. The reality is that you are not alone; in fact, all active investors have some view on how Trump, Brexit, Merkel’s problems in Germany, or the Federal Reserve in the US – to name a few – will impact bond and equity prices. These global, diversified view-points are already reflected in the equilibrium price of securities, agreed freely between buyers and sellers.
Your portfolio is already structured to manage uncertainty
Today’s concerns such as Brexit, Sterling’s weakness, potential tax rises in the event of a Labour government, and Donald Trump in general, are endlessly recycled through the 24/7 media soundbite process, alarming some who are invested in the markets. Well-structured investment portfolios seek to ensure that any market conditions can be weathered in the future, whatever drives these storms. Your highly diversified portfolio, balancing global equity assets with high-quality shorter-dated bonds, is well positioned to do so. Try not to worry. Start by watching the news less.
If you are feeling concerned, please feel free to get in touch to talk further.
Other notes and risk warnings
This article is distributed for educational purposes and should not be considered investment advice or an offer of any product for sale. This article contains the opinions of the author but not necessarily the Firm and does not represent a recommendation of any particular security, strategy or investment product. Information contained herein has been obtained from sources believed to be reliable, but is not guaranteed.
Past performance is not indicative of future results and no representation is made that the stated results will be replicated.
 Global balanced portfolio: 36% MSCI World Index (net div.), 26% Dimensional Global Targeted Value Index, 40% Citi World Government Bond Index 1-5 Years (hedged to GBP) – no costs deducted, for illustrative purposes only. Data source: Morningstar Direct © All rights reserved, Dimensional Fund Advisers.