“Don’t just do something. Stand there!”
Listening to some of the inevitable doom-mongering media fallout from “the great fall of China” this morning I was reminded of one of my favourite quotes from Jack Bogle, a founding father of index investing from a speech he made a couple of years ago.
“While the interests of the business are served by the aphorism ‘Don’t just stand there. Do something!’ the interests of investors are served by an approach that is its diametrical opposite: ‘Don’t do something. Just stand there!’”
Now I am not sure of the original provenance of the phrase, but Jack’s sentiment could not be more relevant today. What he is referring to here is the damage we can do to our investment portfolio by trading too much. Unfortunately this damage is often amplified when carried out at times of market volatility. But this is exactly when investors let their emotions tempt them into such activity.
As confirmed evidence based investors, we have very strong beliefs which underpin our approach. These beliefs are tested at times like these but they have proven to repay us time and again through many different market cycles and similarly testing periods.
I thought it might be useful to share a few key points from our approach:
- Markets and economies are not the same thing and should not be confused as such. Time and again ‘experts’ in the media attempt to explain market movements through economic conditions and forecasts. It is misleading to muddle the two. The stratospheric performance of the FTSE in 2009 happened during one of the worst economic crises the UK has ever experienced.
- The evidence shows us that successful market timing is a fools errand. Not only do you need to consistently time your exit from the market, you also need to predict the best time to buy back in. Many investors miss the recovery which is often delivered quickly and without warning. This is one of the core contributors to the difference between investment returns and investor returns which has been measured in some studies as much as 4%-5% per annum!
- A well diversified equity portfolio with a broadly market capitalised allocation will have 5% or lower in China. Most well diversified investors will have other asset classes within their portfolio such as fixed income or property which will reduce this exposure even further.
- It stands to reason that developed markets will be affected by news from China who are such a large global consumer. Unfortunately this news is absorbed into the prices of the stocks within your portfolio almost instantaneously. Once you hear about it on the news, the effect is already in your portfolio. There is nothing you can do about it and selling then simply crystallises the effect.
So what can you do?
- Understand your portfolio – Really get to grips with it before you bite the bullet and invest. If it exhibits characteristics which make you nervous (i.e it jumps about too much!), you are far more likely to make a poor decision when the next inevitable crisis comes. In this instance, a lower risk approach would be better.
- Get your investment horizons right (as far as you can anyway) – Don’t commit funds to a portfolio which you know you are going to need in the next few years. The chances are that you will want your hands on that cash just at the moment the markets tumble. Your portfolio will struggle to recover from the double whammy of a simultaneous downturn and withdrawal so you need to be able to give it time to recover (which may happen sooner than you expect).
- Concentrate on the things you can control – We know that the most effective way to increase returns without increasing risk is to diversify widely, reduce costs and stay the course when it starts to get a bit rough.
So before you ‘do something’ which may damage your long term returns. I would urge you to think long and hard. Am I letting my emotions drive my decisions? If I sell now when am I going to buy back in? What am I looking to achieve? What is the media agenda with their headlines?.
Here at Brook-Dobson Brear we take our role as risk managers and financial planners very seriously. We pride ourselves on thoroughly understanding our clients as their Personal Finance Director. This means that we know the time horizon for the funds, our clients’ risk profiles and the characteristics of our portfolios to ensure they always get the right choice.
As a result our clients tell us they feel reassured and that they don’t need to worry. Even better, the chances of them making a poor decision are reduced.
If you would like to talk to us about what is in your portfolio, or share your thoughts on different investment appproaches why not get in touch?