Navigating a choppy market takes patience and stoicism. It’s hard to see the outs and the recovery, and it’s very easy to focus on the small time scales. It is very easy to talk a lot about negative scenarios without stopping to think, and it’s essential to understand the long term before commenting.
Though a career of investing, I think a common thread that I’ve seen is that market participants enjoy talking about the downside and the worry more than the stable, slight upwards trending markets – perhaps it intrigue, its driven by a greater surge into risk management in the investment world but whatever the cause – chatting worry and doom is just more popular than commenting on the expected.
Having distilled as much data as possible, we believe the best way to play choppy markets can be summarised in the following simple points.
If you want more on how these fit your portfolio, call one of us:
Hold higher-than-average levels of cash in your emergency funds
If you get caught short in a normal month, investment sales can typically be relied on as a backstop to cover unexpected spending, such as a new car or boiler. While there are no access or liquidity issues in any portfolios, there is no doubt that dipping into portfolios in shaky times impacts long-term wealth as you miss the recovery. While the timing is unknown, assuming it is not coming is inconceivable in any market (perhaps save thermos nuclear). Hold cash to cover surprises, which will protect the portfolio – keep that cushion high.
Pause transfers
There may be an excellent cause based on cost and performance to consolidate that pension, move that ISA, etc. So, go through the analysis with us regardless of markets, but then hit the pause button on implementation for a few weeks/months and look for calm. Time out of the market in rough seas could disproportionately impact long-term wealth, as a pension sold to cash now to be moved may be uninvested for 10 days easily (some of these old life companies are paper based bastions of inefficiency). The market movement in times of stress are so often exaggerated – at 7-8% market move whilst your pension is in cash awaiting transfer, leaves you far underwater for long term wealth and its tricky to play catch up if you get left behind the tide. Unless urgent, restrict transfer activity.
Deploy cash into markets
Consider pulling the trigger in choppy markets if we have been sitting on an idea for you, for example, a company investment account to invest excess cash or the investment of that cash inheritance. Provided that you see over a 7-year timescale on the assets – ie it’s fairly stick stuff, there is no doubt that whilst totally impossible to call the bottom see point 4 – choppy markets are an attractive time to pick up long-term assets at sub-fair values. There is no doubt that good asset managers (we think ours are top percentile) make most of their lifetime returns in choppy markets.
Don’t try to call the bottom
You should all have 7-year + timescales on all of your assets, except pension drawdown, so don’t try to call the bottom. Nobody can – markets price in data before you are even aware of the event’s existence, so however smart you think you are, your data is stale by days, and you’re chasing something that has already happened. The danger of trying to call the bottom is twofold. The first natural thought is that you want to step out of markets for the slide, buy gold, cash, bonds, etc and then move back into the markets at the bottom and ride the up. In reality, what happens is that you execute part 1 well enough and then miss the up, as, by the time you notice recovery, it has happened (see the point on your market data vs the actual market data). The net impact is that you have now baked-in (crystallised) loss into your portfolio, and it’s unlikely that you’ll get back to where you were. Ironically, you have now achieved what you sought to prevent – permanent loss. If you must call the market, you need to predict it before it becomes an event – the holy grail of investing is super forecasting and likely impossible; don’t call the bottom be happy with cheaper than top.
Remember that we have been here before
Many of you with us, actually: 2008 and 2015 double dip, the 2018 Sino-U.S. 1, Covid, Truss, the Trump election and various trading spikes/ dips. Try to regain that perspective and step back from the portfolio – remembering why you didn’t sell it all in COVID might help.
Markets are zero-sum
Money has not left the system; it will flow back when right.
Structural damage and institutional failure/contagion are rare
2008, the landscape felt different; there were bailouts and failures and famous photos of cardboard boxes. Through Covid, money was pumped out of the treasury to support businesses that couldn’t see the other end – payrolls that we were not met and stock rotting through no markets. Whilst not belittling the pressure businesses come under in most market correction , long term lasting damage only really comes from high defaults. Markets are springy and the bounce-back is often as remarkable as the slide.
Chase the opportunity by understanding the timescale well
We’re all long-term investors. If you’re not, call us; you have got this wrong or we have missed something. Think now about where the world is in a decade and how to do well from what’s in front of you now. For example, at 39, I want markets to fall so that my monthly pension investments buy me the most long-term assets – the last thing I need now is to purchase expensive markets each month – I need that at 65, not now. This is probably the year where I can create more wealth for my family than many I have worked through – work out your opportunity. I like it when the market falls as it suits my asset timescale.
Remember that portfolio construction involves diversification and sensibly sized positions.
For example, there is no justification for a portfolio comprised 100% of gold, an asset that has risen this fast—it has a long way to fall. An outsized position could be disastrous for a long-term portfolio. Similarly, it may seem sensible to take outsized bets on the US now – again, return to the broad premise that a balanced asset allocation creates results and avoid this tendency to overconcentrate in extreme markets, the basics of portfolio construction don’t change.
Trust your investment manager
We believe that whatever your preferences are, your money is managed by some of the best investment managers in the industry, thinking continuously about risk, opportunity and asset allocation – even if you are in a passive portfolio remember, it is only the building blocks that are passive and not the asset allocation. Trust them to get on with it. Trust your investment managers.
There is risk in activity
Stay calm and focused on the long term. Hold cash for any capex visible in the next 24 months and aim to push to the high edge of your personal emergency funds—with anything above those cash levels, seek the opportunity, but don’t do anything that doesn’t need to be done now – no transfer, no switch, now is just not the right time to replace that investment manager.
See things in context
If we look at the long term run of one of the bigger multi-index funds its actually quite hard to spot these disasters – it’s very easy to get swept away by the panic, we’re programmed for flight or fight but just take a moment to zoom out.
To paraphrase Tatton – our exceptional Active investment manager – in a recent time of crisis:
“We encourage investors to remain calm and trust that our steady and measured approach will once again be the most appropriate approach to weather these fluctuations and continue to meet our investment objectives. We actively engage internally and with our selected fund managers to ensure portfolios remain positioned to mitigate the risks and take advantage of opportunities.”