Don’t panic if shares plunge (Birmingham Post article 13.12.2018)

They say timing is all … but few are lucky enough to call the Stock Market so trying to dip in and out is never advisable.

Understandably, the recent setback in equity markets has unnerved some people, with clients wondering whether they should move their investments to cash given the so-called “uncertainty” around.

And I can understand their concerns.

But our team went down to London a few days back on an annual trip to meet fund managers, and we found them generally positive despite us being in choppy waters.

They expect markets to be volatile but, as clients should be taking a long term view, the news and emotional reactions can get in the way of rational long-term investment decisions.

Most were looking to increase exposure to growth assets on the back of relatively strong macro-economic fundamentals.

And an interesting point was made by Steven Andrew, manager of M&G’s Episode Income Fund. He highlighted how the news tends to portray a linear series of events with each dominating the headlines and consequently investors’ reactions. In reality, major economic and political events are running in parallel and are all exerting their influences on investment markets, even if they’ve fallen off the front pages.

It is also worth remembering a story which has gone into folklore.

It is about an American with possibly the worst luck in investing history.

He made a total of four large stock purchases between 1973 and 2007. He bought in 1973 before a 48 per cent decline in stocks, bought in 1987 before a 34 per cent decline, bought in 2000 before the dot com crash, and bought in 2007 before the Great Recession. The purchases totalled a little less than $200,000. So how did he do? Supposedly, he ended up with a $980,000 profit for a nine per cent annualized return. What was his secret? He never sold.

Whether that tale is apocryphal, true or somewhere in-between it offers a lesson to all.

For those thinking about switching to a more defensive stance, Jonathan Raymond, investment manager at Quilter Cheviot, notes: “First, people’s concerns are often justified. The world always carries uncertainty and there is enough of it about what with the threat of trade wars and a slowing global economy.

“The trouble is that equity markets generally trend upwards over the longer term, even though it’s not unusual for them to fall by 10 per cent over a short time. The FTSE 100, for example, has regularly fallen by 10 per cent since 1990, but it’s relatively rare for it to fall by more than 20 per cent.”

Selling and moving to cash for six months, effectively a wait and see approach, only works if markets continue to fall, he states.

“It is possible that you sell down to cash only to see the market recover. This then puts a massive dent in your returns profile and forces you to make an uncomfortable decision to reinvest with markets at a higher level.

“I would caution against any knee-jerk decisions based on any feeling of deemed ‘uncertainty’. It’s better to review your risk profile on a fixed, regular basis, rather than move it around depending on how you feel on a day to day basis.

On a long-term view, these setbacks are ‘blips’. If you are still working and ‘accumulating’ capital, you should welcome these setbacks as it allows you to buy more equities with a given amount of capital: when the recovery comes, you get an outsized effect on your overall pot.”

The message is – hold your nerve and volatility can be your friend.