Some of what follows has been taken from a communication I received from 7IM Investment Management last week, I thought it was interesting and worth sharing.
Do you want the good news or the bad news? As it happens, you don’t really have a choice. Your brain is only interested in the bad news.
And unfortunately, the world is a scary place day-by-day. We are bombarded by negative news – studies estimate that just 10% of daily news stories are ‘good’1. And those studies don’t include what people are reading on Twitter and Facebook!
There’s a lot of messy psychological stuff at work here. Our brains are designed to engage more with negative news than positive news, so media outlets keep it coming, swamping our optimism with every click and swipe we make.
2022 has been dreadful for this. If you’re not reading about the war in Ukraine, it’s only because you’re watching the UK Conservative party have a full-scale public identity crisis, or the price of petrol slowly creeping towards £2 per litre, or are queueing at an airport, or worrying about another wave of COVID. Our investment approach in the face of such hysteria is to stay informed and engaged, while not getting overexcited about any single outcome. Arguably that has been even more difficult than usual in the first part of 2022.
I’ve got a few techniques which help me to take the long-term view – going for a long walk without my phone is top of the list or getting lost in a history book or science-fiction novel or watching the Test match. Living in the short-term is just too stressful, and genuinely reduces our ability to make the sensible long-term choices we need to make.
True long-term trends
It’s easy to miss the true long-term trends if we just focus on the short-term. A research company, GaveKal, had a great example of this a few years ago. They asked their readers what the most important event of 2007 was for financial markets.
Most of their readers are investors of some kind, so in one form or another, the answer was “the Global Financial Crisis”. That seems fair enough, that would have been my answer. We’re arguably still dealing with some of the fallout from this. Surely historians of the future will look back and pick that out as the key event of the year?
Perhaps not. Although it was 15 years ago, that is still a short-term way of thinking. Financial crises come around quite often (almost annually if you’re from Argentina or Venezuela). They leave their scars but tend not to change the world. No, the truly important event of 2007 was when Steve Jobs and Apple launched the iPhone, completely changing the way that we interact with the world around us.
Staying diversified and staying the course
Of course, in 2007, no one realised that the iPhone was as important as it has proved to be. Apple shares fell along with everything else, down 50% by 2009, along with the US market.
Since then however, the world has moved on from the financial crisis – the global equity market has quadrupled since its 2009 lows2. But Apple shares are up 56 times. Long-term trends always trump short-term crises.
The investment process of our chosen provider, EBI, is designed to capture these kinds of long-term trends via their strategic asset allocation.
Strategic Asset Allocation
EBI’s strategic asset allocation has two key benefits. First, it keeps our clients invested at all times. Over time, financial markets reflect long-term trends in the world; Apple moved from being less than 1% of the US equity market in 2009 to nearly 7% today. That’s why, more than anything else, staying invested in times of crisis is important, as it lets you capture these global trends. Having a plan for staying invested is essential.
Secondly, their strategic asset allocation keeps our clients diversified. It’s difficult to identify where and what the genuine long-term trends in the world are going to be. In 1989, the world was obsessed with the fall of the Berlin Wall, and the end of the Cold War. But in the mountains of Switzerland, Tim Berners-Lee had just created the World Wide Web. Which mattered more?
Sometimes even a century later, it’s tough to know what’s important: 1928 saw the discovery of penicillin and the launch of world’s first television station. I’m not sure I know which has been more important to the development of society. So, we need to make sure we’re invested in a little bit of everything, regardless of what seems most important at the time. A broadly diversified asset allocation keeps lots of fingers in lots of pies.
What will be the defining event of 2022 for financial markets?
It feels tempting to say Russia and Ukraine. But the truth is that may just be a geopolitical blip. What if it’s the shift to working from home of the way workers are paid, reducing inequality? Could it be the downfall of Facebook and Twitter? We just don’t know and may not know for years.
So, we rely on EBI’s robust investment process. Remaining invested, across lots of different sectors and regions, all of the time; it worked in 2008, and through Brexit, and COVID-19, and so far in 2022. We think it will keep on working for the next few decades too.
I do hope the above makes sense but, as always, if you have any concerns about your own financial arrangements or would like to discuss whether you are truly making the most of your money, please do not hesitate to call me.
With kind regards,
Yours sincerely
Graham Ponting CFP Chartered FCSI
Managing Partner
1 G. Lengauer, F. Esser, R. Berganza, Negativity in political news: A review of concepts, operationalizations and key findings. Journalism 13, 179–202 (2012)
2 Data from 01/03/2009 to 30/06/2022
