Global shocks can scupper ill-prepared investors (Birmingham Post Article 04.05.2023)

I came across this phrase recently in respect to investing – “prepare, don’t predict”.

It sums up perfectly how investors should consider their portfolios over the long term and ensure diversification.

Here is just a very short list of events that no-one (or very few people) predicted, most of which were entirely unpredictable, if not that they happened, then certainly the timing, all having very significant effects on asset prices, at least in the medium term:

  • War in Ukraine – there were warnings in the couple of weeks prior to the invasion, but, outside of Putin’s closed circle, even six months before it was barely considered a threat.
  • Huge and rapid rise in inflation – in Oct/Nov 2021 most central banks and commentators were saying inflation was a transitory risk, then it shot up to double figures. They are still playing down inflation now, saying it will naturally recede as oil price rises come out of the equation. However, this fails to take into account that most manufacturers and suppliers can’t pass on rises in their costs to consumers immediately. They can over time, so there are still a lot of potential price increases to wash through the system.
  • Covid – it was assumed that there would be a global pandemic at some point, but governments had been preparing for one for so long that they simply stopped bothering. When it actually happened, everyone was left scrambling for quick solutions.
  • Global financial crisis – there were a limited number of sages who asserted that the excesses in the global finance and banking sector would indeed lead to problems, but only a handful were on the button with the timing or the specific outcomes.
  • Virtually every recession and stock market crash – these things come in cycles but it is impossible to extrapolate when they will occur and how bad they will be. Global recession was forecast for most of 2022 but it failed to materialise. Economists, central banks and investment houses are now predicting recession for 2023, but it isn’t really showing much sign of appearing at the moment. We can say with certainty it will happen: but when?

Portfolio diversification is recommended exactly because you never quite know how things will turn out and what asset class might be worst affected. If stocks are going down, property may be going up.

It goes back to the old saying – don’t put all your eggs in one basket.

Rebalancing a portfolio has proved to be an effective risk mitigation technique in the past.

All a bit like managing your day-to-day finances by creating a budget, growing an emergency fund and having appropriate levels of insurance. We do these as a hedge against setbacks.

It’s much the same with investments.

Trading stocks and shares short term is often a recipe for panic selling when things go badly wrong.

Investopedia cautions that however good the analysis, it is only as robust as the information available.

It states: “Predictions are often based on strong emotional feelings. Trying to predict a turning point in the market can be costly. Traders are better off trading the averages and trading in the direction of price movements to gain profits as opposed to looking for one trade or stock that rises aggressively in their favour.

“Stock market volatility has increased over the years, while the holding period for securities has fallen off. Buying and holding is still a viable strategy if the method is well-devised, but investors must be aware that volatility can reach very high levels and be prepared to wait out such periods.”

Remember – prices rarely move in straight lines for long.