Do you want the Bad News or the Good News?

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

Inflation, Interest Rates and Recession

This is my first ‘Round Robin’ e-mail since the end of June but that doesn’t mean I have not been paying attention to what has been going over the past couple of months – and it has been a lot!

The war in Ukraine continues unabated with seemingly no peaceful resolution in sight and this has exacerbated the inflationary pressures already being felt around the world. We knew of course that inflation was likely to rise as we emerged blinking into the sunlight at the end of the pandemic, people had money to burn and supply chains remained gummed up, with some countries, notably China, still enforcing lockdowns even now – the war in Ukraine has just made things worse.

The impact of the war in Ukraine cannot be overstated, the dramatic increase in wholesale gas prices is largely down to restricted supplies coming out of Russia and it’s difficult to see this changing much in the short-term, particularly while sanctions persist, and Putin needs a way to fight back.   

The outlook for the UK has worsened considerably over the past few months as the Bank of England (BOE) constantly revises its inflation forecasts upwards, heralding a tough winter ahead with energy bills likely become difficult for some and unaffordable for many. Whether or how the government can help those most in need remains to be seen.

The following chart shows how dramatically the BOE forecasts have changed since 2021:     

There are 2 particularly striking aspects to this chart,

1. How did those in charge of forecasting inflation, the so called ‘experts’, get it so wrong?

2. The expectation remains that inflation will revert to somewhere near the BOE’s target of 2.0% per annum by the end of 2024. Given my question in 1. above, how much confidence can we have that inflation will not prove more stubborn and difficult to shift?

In May 2021, the BOE was predicting inflation would peak at around 3.0%, by Feb 2022 this forecast had increased to 7.0%, only to be revised upwards again in May to 10.0% and then last week to 13.0%! As I say, how could they have got it so wrong?

It doesn’t help to apportion blame for this incompetence ….. but I’m going to. It’s Andrew Bailey’s fault, along with his fellow Monetary Policy Committee (MPC) members! Bailey was head of the Financial Conduct Authority from 2016 to the time of his appointment as Governor of The Bank of England, and he was pretty useless there too, presiding over a number of financial scandals in which many innocent victims lost their savings and dreams of a comfortable retirement. His reward for these failings was to be appointed to even higher office, a perfect example of someone being promoted beyond their capabilities, I do remember shaking my head at the time.

By way of providing a little balance, it must be said that being Governor of the BOE at the moment is something of a poison chalice, but we really should be able to expect more from our central bankers, steering us through this kind of maelstrom is pretty much their one and only job.

The markets take on this has been clear, the BOE should have raised rates sooner and more sharply as a signal that taming inflation was an urgent priority; it does now at least seem to have got the message. Last week’s Interest rate increase of 0.5% was the highest in 27 years, taking us to 1.75%.

The following chart shows how the Base Rate has changed since 2006.

The purpose of interest rate increases when attempting to combat inflation, is to reduce the amount of money in the economy, the idea is that if people and businesses have less money to spend (because their borrowing costs have gone up), demand will fall, followed soon after by prices. Whether this tactic will work, given that current inflation has not been caused by an overheating economy but (partly at least), by a foreign war, remains to be seen.

What interests me about the above chart is that there must be an entire generation of borrowers who have grown up on super cheap money and who might now face significant increases in their monthly mortgage and/or credit card payments at a time of rising energy bills and other non-discretionary items like food.

The last time interest rates went up by 0.5% rates were already higher, so the impact was arguably less. Going from 1.0% mortgage payments to 2.0% say, means your payments will double; if you are a young couple on a tight budget facing a winter of higher bills, this must be very concerning indeed.

At the BOE press conference, Andrew Bailey mentioned the dreaded ‘R’ word, recession and this prompted my eldest daughter to ask me, ‘What’s the difference between a recession and a depression?’ I think the following definition just about it sums it up:

I have already learned the difference between a Recession, a Depression and a Panic.

A Recession is where you tighten your belt; a Depression is when you haven’t any belt to tighten, and a Panic is when you have lost your pants.

— The Ephraim Enterprise (Ephraim, UT), 21 Jan. 1949

A depression is no laughing matter of course, just spend a few minutes reading about the early 1930s and you’ll see what I mean. By the way, I don’t think anyone is actually predicting a full-blown depression.

What did the financial markets make of all this talk of catastrophe? As usual, all the bad news, the increase in rates, the threat of recession etc. had already been priced in, and markets hardly moved at all. In fact, in recent days, US jobs data has surprised on the upside, putting a question mark over whether the US might actually escape a recession and markets have moved further forward. As I type this on 8th August, the FTSE is up 0.83% and the S&P 500 is up 0.74%, following quite a decent recovery which began on 16th June, see below:  

This chart shows the performance of a selection of the EBI portfolios since 16th June (yes, I did select the date carefully).

The portfolios are still down Year to Date, but things are looking a little better, for now.

This positive past few weeks does not necessarily mean the Bear Market is over and it’s entirely possible that markets might lurch downwards again at any moment BUT this shouldn’t alarm long-term investors.

Conclusion

In conclusion, the markets maybe don’t seem as pessimistic about prospects as Andrew Bailey did during his press conference but as always, we’ll have to wait and see.

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 MCSI

Managing Partner

“Why have my low-risk investments gone down?”

It is a good question and one I have been hearing a lot lately.

Traditionally it has been accepted that one of the best ways to protect oneself from steep equity market falls is to include high quality bonds in a diversified portfolio. Usually, we would expect to see higher concentrations of bonds lead to lower volatility when stock markets around the world encounter turbulence, so why isn’t that happening now?

In a typical market cycle, the economic conditions that might lead to an equity market correction, are often the same conditions that favour bonds. As an economy contracts for example, interest rates tend to fall to help businesses and consumers with the cost of borrowing, this reduction in interest rates makes the fixed income yield of a bond more attractive and, as result, prices of bonds go up while equity prices are falling.

In a 50/50 portfolio of equities and bonds, if the equity market falls by 10% and the bond market rises by say, 4, then the net loss is 6% and not the full 10% experienced by equities. In these circumstances the bond holding has done its job in mitigating the worst of the falls.

What we are seeing now however, is something of a perfect storm, even for the most highly diversified portfolios; currently there really is nowhere to hide.

The following is taken from some interim commentary by Evidence Based Investments (EBI) whose expertise we employ in constructing and managing our portfolios.

“Current Situation

The current situation is rare in that both equities and fixed income have been falling. High inflation and fears of a slowing growth rate have been headwinds to both asset classes and headaches to central banks.

Inflation concerns have rapidly increased in the first half of the year. While central banks thought inflation would partly normalise and take care of itself in 2022, they were blindsided by the sudden Russian invasion of Ukraine. Russia is also a major energy and commodity producer providing roughly 10% of the global supply of oil and supplying Europe with around a quarter of its crude oil imports and 40% of its natural gas imports. The sanctions put in place have therefore affected energy and commodity prices, pushing them exponentially to extreme levels. This has intensified the surge in inflation, supply chain disruption, and the risk to global growth. The biggest issue we are seeing is when certain industries can pass off inflationary pressures to the consumers: prime examples are the energy, automotive and retail industries.

Why are bond prices falling?

The main narrative is the shift in gears by the central banks on hawkish stances which has led to further downward pressure on bond prices. The market environment is rare in that bonds and equities are falling in the same direction due to inflationary pressures. The unfortunate events taking place in Ukraine have exacerbated inflationary pressures due to the unexpected inflation created.

For a bond, one of the risks incorporated into a bond’s price comes from interest rates. Since we are currently in a high inflationary environment or heading towards a period of higher inflation, the increased inflation will tend to be countered by an increase in interest rates to steer the economic growth rate to a sustainable level and soothe inflationary pressure. Bond prices have an inverse relationship to interest rates, therefore when the cost of borrowing money rises (when interest rates rise), bond prices usually fall, and vice-versa. The Bank of England has recently increased the base rate multiple times within a short period, with the market pricing in further increases expected throughout the year. EBI portfolios are well-positioned to weather this type of environment due to the effective duration of our bonds. Our average effective bond duration is short-dated (4.3 years compared to 7 years of the Bloomberg Global-Aggregate) and duration can be interpreted as the measure of the sensitivity of a bond’s price to changes in interest rates. Therefore, the bond portion of our portfolio has reduced risk stemming from interest rate rises compared to longer-duration bonds. Short-duration bonds are closer to maturity and have fewer coupon payments remaining, nevertheless, we are not immune to market events.

Conclusion

With the current economic climate, it’s easy to be sucked into flashfire reporting using a short-term lens. It’s important to remember the primary role of bonds in a well-diversified portfolio, the bond portion of the portfolio is there to offer stability against the increased volatility of equity markets over the long-term, and shorter-duration bonds inherently have less inflation and interest rate risk and provide better protection and a smoother path.”  

The following chart shows how EBI’s higher concentration of shorter-dated bonds has led to lower falls than the bond market as a whole, scant comfort though that may be during this difficult period.

As I have been explaining to several clients, at some point the economic weather will change and with it, investor sentiment. In the Sunday Times this week and in a couple of blogs I have been reading, there is already talk of the falls in both bonds and equities possibly being overdone and that the gloomy outlook has been more than priced into current valuations. As usual we will just have to wait and see.  

I do hope all of 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 MCSI

Managing Partner

“Here’s why you should learn to take more risk!”

You will notice the heading is in quotation marks and this is because it was the title of an article I saw in the Money Section of The Sunday Times yesterday (12th June 2022), written by Ian Cowie.

Markets had another terrible few days last week as fears of a global recession persist and the war in Ukraine rumbles on, with no end seemingly in sight. Despite this and the extended decline in almost all asset classes since the beginning of the year, Ian Cowie is telling us to take more risk…….and I agree with him. We must never confuse short-term volatility with the possibility of no long-term growth.

Ian’s article follows:  

“Why do so many savers and investors misunderstand the relationship between short-term risks and long-term rewards? If that sounds a tad theoretical, then be aware that it might make the practical difference between living where you like and doing what you want, instead of having to settle for something much less enjoyable on both fronts.

The reason I ask is that new savings statistics from HM Revenue & Customs suggest that most people are still making the same old mistake with their annual Isa allowance.

To be specific, two thirds of holders of these valuable tax shelters are wasting time and money in bank and building society cash deposits, despite their meagre returns remaining barely visible to the naked eye.

It is a historical fact that shares reflecting the changing composition of the London Stock Exchange delivered higher returns than cash deposits in three quarters of the five-year periods since records began in 1899.

You don’t need to take my word for it, Barclays Bank publishes an annual analysis of returns from shares (also known as equities), plus cash deposits and bonds (gilt-edged stock issued by the British government) over the past 123 years.

The Barclays Equity Gilt Study shows that if you could afford to set aside money for five years in a row, you had a 76 per cent probability of doing better in shares than deposits. Put another way, the odds of doing better with equities for medium-term investors are slightly better than three to one.

People who could afford to remain invested for ten consecutive years enjoyed a 91 per cent probability of equity outperformance, despite the period of analysis including the Great Depression, both World Wars, Brexit, the Covid crisis and many stock market crashes. If I had to point to a single fact that made me a long-term investor in shares, that would be it.

Of course, there is the short-term danger of loss. If you could only remain invested for two consecutive years there was a 69 per cent probability of shares doing best. In other words, there was nearly a one-in-three chance that deposits would beat shares. What it all boils down to is the difference between the danger of short-term speculation and the rewards of long-term investment.

Against all that, another important fact in favour of deposits is that the Financial Services Compensation Scheme (FSCS) provides a statutory safety net to ensure that you will always be able to get back £1,000 for every £1,000 you deposit with a registered bank or building society, up to £85,000 per institution, per person.

Unfortunately, that guarantee only relates to the nominal value of your money, rather than its purchasing power.

The real value of money you set aside to spend in the future is falling by 9 per cent a year, according to the Consumer Prices Index (CPI) measure of inflation, or 11.1 per cent according to the Retail Prices Index (RPI). If inflation remains at those rates, CPI would halve the purchasing power of money in eight years, while RPI would take less than six-and-a-half years to do the same.

Bear in mind that Barclays has no reason to diss cash deposits because there are fat profits in banks paying individual savers a pittance, while these institutions invest your money to work for their own shareholders’ benefit elsewhere. By contrast, this DIY investor prefers to put my money to work for me.

Better still, in addition to the probability of bigger long-term returns, investors can immediately enjoy more income than savers because many shares pay dividends that beat bank deposit interest rates.

For example, McDonald’s (stock market ticker: MCD), the biggest fast-food chain in the world, which is due to distribute dividends on Tuesday, was yielding 2.3 per cent on Friday.

That’s the value of the income paid to shareholders, expressed as a percentage of the current share price. Interestingly, the independent statisticians Refinitiv calculate that MCD’s dividends have increased by an average of 7.8 per cent a year over the past five years. So, if that rate is sustained, shareholders’ income will double in less than ten years.

None of that is guaranteed but MCD has raised its dividends every year since 1976. Here and now, 30 per cent net profits give a return on investment of 15 per cent, so the burger-flipper should continue to supersize payouts for a while yet.

This DIY investor paid $95 per MCD share in July, 2014, as reported here at that time, and they trade at $238 each now. That has made this business my third-most valuable holding, worth a low six-figure sum.

I could report similar returns from other top ten holdings, including the tractor-maker Deere (DE); the technology giant Apple (AAPL) and the agricultural commodities group Archer Daniels Midland (ADM).

None of these businesses could be described as low-profile or high-risk. But they all beat the banks when rewarding long-term investors for putting our money at risk. I’m lovin’ it.”

Summary

No matter how counter-intuitive it may seem, now is the time to be investing cash (maybe transferring Cash ISAs to Stocks and Shares), for two reasons:

1. Inflation is going to erode the spending power of your cash savings increasingly quickly if it persists at current levels, or even if it falls back to say, 4% per annum. Unless your cash is delivering at this level (spoiler alert – it’s not) after tax, then you are destined to become poorer, even though the nominal value of your money stays the same.

2. The markets are at levels last seen more than a year ago, this means, from a long-term perspective, they are at a discount!

I do hope all of 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 MCSI

Managing Partner

Update – 26th May 2022

As the war in Ukraine shows no sign of ending, conditions for investors across the world remain challenging; inflation is rising, supply chains continue to be stretched and consumer confidence is low. Against this backdrop which has existed since the start of the year, both equity (shares) and bond (fixed income) markets have fallen; equities have fallen because of worsening outlook for consumers and the prospect of a recession and bonds have fallen because rising interest rates (to combat inflation) reduce the value of the fixed returns that bonds provide.

The impact of these headwinds has been felt within the Clearwater Investment Portfolios constructed by EBI but also by every other fund manager across the globe. No manager of highly diversified portfolios is immune from market corrections and the following charts provide confirmation of this.  

The first chart shows how our Vantage Earth 60 has performed since the start of the year, when compared with the following benchmarks:

UT Mixed Investment 0%-35%

UT Mixed Investment 20%-60%

UT Mixed Investment 40%-85%

As a reminder, Vantage Earth 60 has 60% exposure to global equities and 40% exposure to global bonds, it is the most popular portfolio with clients of Clearwater, as it provides an opportunity for real growth with manageable downside risk.

The numbers next to each of the benchmarks represents the percentage exposure to equities of the funds contained within the benchmark. So, UT Mixed Investment 20%-60% represents all funds in the UK that have exposure to equities of between 20% and 60% - The very lowest would have 20% equity exposure and the very highest 60%, whereas Vantage Earth 60 has exactly 60% exposure to equities.

In a rising market we would expect Vantage Earth 60 to outperform the 20%-60% benchmark because it has higher equity exposure than many of the funds contained within the benchmark. Similarly, we would expect Vantage Earth 60 to underperform the 40%-60% benchmark because many of the funds represented will have higher equity exposure.  We would, of course, expect the reverse to be true in a falling market, as the funds with the highest equity content will usually fall furthest.

Let’s take a look at a chart showing how things have gone since the beginning of 2022:

I would say, this is pretty much what we would expect to see, given market conditions that have prevailed since January.

I have included the above chart so that our clients might take comfort from the fact that, although their investments have been falling, as happens from time to time, they are not alone.

This might lead you to question, ‘If I am only matching the benchmarks, where are Clearwater and EBI adding value in the investment process?’ Over the short-term this is not always obvious but if we extend the time period covered by the chart, things do look a little different.

This next chart replicates the first but over the last 5 years:

In the above chart EBI Earth 60 has clearly outperformed the comparable benchmarks.  

What about the outlook?

The following is taken from some commentary I received this morning from 7IM Investment Management:

“There is a saying in finance – ‘markets can only look around one corner at a time’. Headlines tend to jump from one narrative to the next. Suffice to say, investing on this basis is not a great strategy. Worrying about the next corner often results in poor decision making – usually demonstrated by selling after the fear has already been priced in. Instead, we try to build portfolios for the longer term, looking around 3 or 4 corners.

When we look around the first corner, there are some near-term concerns. Goods producers thought we’d be at home for longer than we were, and as a result, have made too much stuff – there is almost certainly a manufacturing slowdown coming. The surge in rates is taking the steam out of the housing boom. And higher inflation is eating into strong wage gains.

But looking beyond this first corner, it looks to us that any growth slowdown is likely to be short-lived. The manufacturing slowdown is just a reversion to normal production – we overspent on goods while locked down, and now we’ll underspend for a bit. The imbalance between housing supply and demand means that the rates impact will be short-lived – people need to live somewhere! And those pent-up savings are still there, ready to supplement spending where required.

Putting it together, we believe any near-term growth slowdown will be moderate, short-lived, and eventually give way to stronger growth.”

I thought it was good to end on a note of optimism!

As always, if you have any concerns about your own financial arrangements and 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 MCSI

Managing Partner

Time in the Markets and not Market Timing!

"Far more money has been lost by investors preparing for corrections, or trying to anticipate corrections, than has been lost in corrections themselves." – Peter Lynch, Mutual Fund Manager

During periods of heightened financial market volatility, and increased levels of uncertainty, it can be tempting to try and time the market by selling assets and then buying back at a later stage. However, timing the market is virtually impossible, even for the most experienced investors. This is why it's often said that, time in the market is more important than timing the market.

As investors, we are often too emotional about the decisions we make. When markets dive, too many investors panic and sell; when stocks have had a good spell, too many investors go on a buying spree. Many investors try to time the market, however, having such a short-term horizon can harm performance and jeopardise your long-term financial objectives.

People tend to ‘panic sell’ based on their past experiences. There have been six major crashes in the past 30 years, so psychology plays its part.

-              1987 Black Monday

-              1997 Asian economic crash

-              1998 Russian economic crisis

-              2001 Tech stock crash

-              2008 global financial crisis

-              2020 COVID-19 selloff

It is never an easy ride on the way up in a bull market. Investors seem perpetually concerned, worried about the valuation levels, forever peering around the next corner and ever watching for the canaries in the coal mine that might signal the onset of the next market downturn. Prospect theory from behavioural finance suggests that investors are more likely to focus on gains rather than the perceived risk of loss when the outcome of an investment is uncertain. This ties into regret aversion where the fear of a loss outweighs the joy of winning – hence many investors panic sell when the going gets tough. This is a large reason why investors are always encouraged not to look at their investments every day.

The pace at which markets react to news means stock prices have already absorbed the impact of new developments and when markets turn, they turn quickly. Those trying to time their entry and exit may actually miss the market bounce. Timing the market is trying to predict the future and you could end up being out of the market when it unexpectedly surges upward, potentially missing some of the best performing days.

No one can consistently pick the best or worst days of the year, so this is why it can be so dangerous for investors to miss time in the market by trying to time the market. If you miss one or two big days, compounded over time, this can greatly impact your portfolio.

The graph below illustrates how a hypothetical $100,000 investment in the S&P 500 Index would have been affected by missing the market’s top performing days over the 20-year period from 1 January 2002 to 31 December 2021. For example, an individual who remained invested for the entire time-period would have accumulated $616,317, while an investor who missed just five of the top performing days during that period would have accumulated only $389,263.

Source: BlackRock, Bloomberg

Adding to the difficulty of trying to time the markets, most of the best days happen around the worst days. Over the last 20 years, 70% of the best 10 days happened within two weeks of the worst 10 days (Source: Factset). Incessantly going in, and out, of the market erodes returns and can also have tax implications and transaction costs.

It is true that a broken clock is right twice a day and hindsight is wonderful, but we are not soothsayers. If it was easy to time the market, lots of investors would be doing it and retiring early in the Bahamas, but this is not the case. We must remember that short-term volatility is the price you must pay for the chance of higher long-term returns and let the power of compounding take effect rather than potentially crystallising losses.

Diversification

Avoiding all risk is impossible but we must look at what we can control in the investing world – having a well-diversified portfolio that can weather the stormy financial markets is one of the few things we can do.

Each of the coloured boxes in the chart below represents a different asset class, don’t worry if you can’t clearly see which is which, it isn’t a very clear picture. The point is that there is no clear pattern that emerges over time, as to which is the best asset class to invest in, thus the only way to be sure of capturing the ‘free’ rate of return that capitalism provides is to invest in the most diversified way possible, which of course, is what we do.   

In summary, holding a highly diversified portfolio and not responding in a knee jerk fashion to short-term market volatility is the best way to guarantee long-term returns in excess of inflation. BUT, in pursuit of these returns we must accept that, from time to time, markets will fall and losses can appear on paper, however, these losses are temporary, they only become permanent if you sell.

Having spent most of this piece arguing that timing the market is a very difficult game to play, it does stand to reason that when markets have fallen, opportunities to invest at better prices do arise. As I always say, markets could still go down from here, but one thing is certain, they are cheaper than they were 4 or 5 months ago, so now could be a good time for the long-term investor (all of our clients) to add to their holdings.   

As always, if you have any concerns about your own financial arrangements and 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 MCSI

Managing Partner

Some words of wisdom for the nervous investor!

The following is a refresher of an e-mail I sent on 27th March 2018 when markets were, as now, lurching all over the place. I have added a chart at the end to give some additional weight to the comments below.

‘I am a great fan of a man called Nick Murray, a Financial Adviser in the US, and what follows are a few of his beliefs around investing. I subscribe to these views 100%!

I thought you might these pearls of wisdom reassuring while markets seem to be going through a turbulent period.   

I believe that the great long-term risk of stocks is not owning them

On July 8, 1932, the intra-day low of the Dow Jones Industrial Average was 40. On October 14, 1996, the Dow closed over 6000. The intervening period was the worst in human history: Depression, WWII, Cold War etc. However anecdotally, I infer from these data three things. The right time to buy stocks is now (as long as you have the money); the right time to sell them is never (unless you need the money); the great risk is not owning them. Incidentally the Dow Jones, even after recent setbacks, sits at around 25,000. That was in 2018, the Dow is currently at over 33,000.

I believe that everything you need to know about the movement of stock prices can be summed up in eight words: the downs are temporary; the ups are permanent.

I never mistake fluctuation for loss. Share prices go down all the time – 25% or so on an average of every five years (albeit not lately) – but since they never stay down, it turns out not to matter. Markets fluctuate but do not create losses. Only people can create permanent loss by mistaking a temporary decline for a permanent decline, and panicking out. No panic, no sell. No sell, no lose. The enemy of investment success is not ignorance, it’s fear. So, it’s my faith, not my knowledge that saves the investor’s financial life.

I process the experience which most people describe as a ‘Bear Market’ in two different words; BIG SALE!

Since all declines are temporary, I regard all major generalised equity price declines as an opportunity to stock up on some more truly safe investments before the sale ends.

I don’t believe in individual stocks, I believe in managed portfolios of stocks

I can break a pencil; I cannot break 50 pencils tied together. That’s diversification. Thus, one stock can go to zero but stocks as an asset class can’t go to zero.

I believe that dollar-cost averaging (making regular investments over a long-period of time) will make the dumbest person in the world wealthy. Hey, look at me; it already has! 

The more ‘knowledge’ you have the more you try to outsmart the market, and the worse you do. The more you see the market as long-term inevitable/short-term unknowable, the more you’re inclined to just dollar-cost average and the better you do. Dollar-cost averaging rewards ignorance with wealth.

I love volatility

Volatility can’t hurt me because I am immune to panic. And, it can help me in a couple of ways. First, in an efficient market, higher volatility means (and is the price of) higher returns. Second, higher volatility when I’m dollar-cost averaging means even higher returns. Higher returns are good. Trust me on this.

I’m not afraid of being in the next 25% downtick. I’m afraid of missing the next 100% uptick!

And I’ve noticed that I have no ability whatever to time the markets. Still, I have found a way to machine the risk of missing the next 100% uptick down to zero. It’s called staying fully invested all the bloody time. Works for me.

I believe that prior to retirement, people should own as close to 100% equities as they can emotionally stand. Then, after retirement, I believe they should own as close to 100% equities as they can emotionally stand.

If it follows that stocks will always rise (eventually), then the above has to be true. Whether your emotions can stand it is perhaps a different matter. Many would happily sacrifice some of those higher returns for a good night’s sleep.’

That was the missive from 27th March 2018, the following chart shows what has happened to the FTSE 100 and S&P 500 since! This includes the falls we have seen since the beginning of the year, owing to the situation in Ukraine, rising inflation and threats of higher interest rates.

The big dip in April 20 was COVID of course.

I hope this chart provides further evidence, if any were needed, that all we need do to ensure we don’t make losses when markets become unsettled, is precisely nothing!  

This doesn’t mean markets won’t go lower from here, they may well do, but as long as we don’t panic we are unlikely to suffer any real long-term damage.

If you have any concerns about market gyrations over the coming weeks and months, just come back to this and every time you get an attack of the jitters (we all do, even me); keep rereading it

As always, if you have any concerns about your own financial arrangements and 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 MCSI

Managing Partner

Performance/Volatility Update

Just as I was beginning to think spring had finally arrived after a pretty gloomy winter, I awoke this morning to snow flurries and freezing temperatures; let’s hope spring for real is not too far away.

As you will doubtless be aware, markets have been battling a number of headwinds over the past few months, the ending of the pandemic (maybe we are not quite there yet), rising commodity prices (in particular gas and oil) and of course the war in Ukraine.

As the world returns to some sort of normality, following the dark days of the pandemic, businesses that had benefitted from lockdowns (Netflix, Amazon, Apple and Peleton, for example) are coming off their all-time highs and industries that had suffered, are doing rather better. The problem is that many companies had effectively mothballed factories and workforces and the sudden increase in demand for their goods and services has led to rising inflation, which has only been exacerbated by increasing commodity prices. Supply chains that were effectively broken by different countries locking down at different times have also yet to be repaired – look at China right now, back in lockdown. Central banks, as they always do, have turned to increasing interest rates to try to exert control over this inflation and this too has put pressure on financial markets. Higher interest rates in corporate world means higher borrowing costs, leaving less for investment etc.

Not all markets have been affected equally, and this is why I wanted to shed some light on what has been going on with your investments with Clearwater.

Over the longer term, US markets have consistently outperformed UK markets, largely because most of the ‘new’ industries, technology in particular, are based there. Conversely, the UK market and certainly the FTSE 100 is made up of more traditional, dare I say, ‘old’ industries, such as oil, mining and banking etc. Since early January therefore, owing predominantly to rising oil and gas prices, the FTSE 100 has (quite unusually) been outperforming the main US Indices (Dow Jones, Nasdaq and S&P 500).

This unusual occurrence has coincided with Clearwater and our investment advisers, EBI increasing our exposure to the US as part of the move to the ESG range of portfolios. Most Transact clients have now made the transition and Standard Life clients are being invited to make the same change right now.

To give you an example of how things are changing/have changed within the portfolios, EBI Portfolio Vital 60 contained US exposure of 30.77% and UK exposure of 26.79%. The equivalent ESG screened Vantage Earth Portfolio 60 has US exposure of 50.07% and UK exposure of just 6.98%. This means our new portfolios are much more sensitive to movements in US markets than the UK.

The following charts will demonstrate why EBI have been keen to make these changes and also why, because of the unusual global economic backdrop, there was a period after Christmas where this worked against us.

This first chart shows the FTSE 100 vs S&P 500 over 5 years. The outperformance of the US, largely because of the rise of the tech giants, is clear to see.

This next chart looks at the same 2 indices over the past 12 months and the picture is the same, The US has outperformed the UK, although there was a coming together around the turn of the year.

BUT! The next chart focuses on the Year to Date and here we can see a slightly different picture. Since the beginning of Jan, the US markets have fallen whilst the UK has remained buoyed by its concentration in industries that have benefitted from the commodity boom; think of Royal Dutch Shell and BP etc.

When we look at just the last month however, we start to see a return to what I would call, ‘normal service’ being resumed. Since the end of Feb, the US has been back firmly in the driving seat once again and it is probably only a matter of time before the lines in the chart above cross over – no guarantees of course.

As progress towards a cease fire in Ukraine continues to be made, albeit falteringly, markets have calmed down somewhat and many of the losses (on paper only, of course) have been recovered. I don’t know whether this heralds a return to more normal markets (just a misspoken word by Biden, Putin, Zelensky, Johnson or any of the other many protagonists, could shake things up once again), but let’s hope so.

Please also remember, there will always be something affecting markets but as long-term investors we can generally relax and ignore short-term volatility, it only hurts us if we sell!   

Regardless of investment markets, I am sure we all hope for a peaceful resolution and an end to the suffering in Ukraine, as soon as possible.  

I hope the above is helpful but, as always, if you would like to discuss this or any other finance related matter, please do not hesitate to contact me.  

With kind regards,

Yours sincerely

Graham Ponting CFP Chartered MCSI

Managing Partner

Russia and Ukraine – Brief Update

Well, this has all happened remarkably quickly and despite US and UK intelligence making it clear that this was what Putin intended to do, I don’t think many rational people really thought he would actually go ahead with it. The main reason being that the risks to his country economically and more importantly (to him anyway), his domestic reputation and his legacy, are so great.

The United Nations have made it clear, ‘He must fail, and he must be seen to fail.’ Faced with this level of international resolve, it seems remarkable that he believes he can win the long game. His success in annexing Crimea in 2014, is one thing but invading a sovereign nation, is something completely different and he may have bitten of more than he can chew this time.

I received the following update from Scottish Widows this afternoon and although it doesn’t really add anything that I haven’t covered in previous missives, I thought you might like to hear it from someone else – in case you thought it was just me.

“Ukraine: Focussing on the Long-Term, Despite Market Uncertainty

In a televised speech at 05:55 Moscow time (02:55 GMT) on Thursday 24th February, the president of Russia, Vladimir Putin, announced a "military operation" in Ukraine's eastern Donbas region, with reports of tanks and troops pouring into Ukraine along its eastern, southern and northern borders.

This marked the start of a Russian invasion of Ukraine and represents a significant and serious event for European and global relations. Aside from the tragic human consequences of the unfolding events, the news of Russia's invasion of Ukraine has other wide-reaching effects, with the volatility in financial markets one of the immediate and visible impacts for investors globally.

The first day of the invasion saw equity market declines globally, with the FTSE 100 Index of largest UK stocks down almost 4% and the DAX index of the top 40 stocks in Germany falling by a similar amount. The Russian MOEX Index dropped by over 30%. Crude oil markets also reacted, with the price of Brent crude - a commonly used benchmark of oil prices globally - rising above US$100 for the first time in over seven years.

In early trading on Friday 25th February, several equity markets had rebounded somewhat, with the FTSE 100 and the DAX 40 Indices both up by around 3.0%.

Volatile times

Over the past few months, in the runup to Russia's invasion, volatility had already returned as a feature of investment markets. Worries included the trajectory of global economic growth and the pressure on major central banks to raise interest rates to curb inflationary pressures. The uncertainty caused by the start of hostilities in the Ukraine has added to this bout of market turbulence.

While the catalyst for current market reaction is clearly very different from some of the more recent and sizable market shocks - such as the Covid-19 pandemic or the global financial crisis - there is the potential for these to be considered when looking for likely comparisons. It's worth recalling the sharp market falls in shares and bonds across the world in March of 2020, as the Covid-19 pandemic unfolded, amid the initiation of lockdowns and the shuttering of industries in many countries globally. We have since seen markets and economic growth stage robust recoveries, even though the pandemic is not over. To put it into context, global equity markets (as measured by the MSCI World Index) posted an incredibly strong return of around 23% in sterling terms over 2021, and similarly robust returns in 2019 and 2020 calendar years.

Multi-asset investing

In our view, market shocks highlight the important role of diversified multi-asset portfolios, where bonds, equities and other asset classes can complement each other. Many studies have shown that by having diversified portfolios you invariably spread risk, without reducing potential returns. In part, multi-asset portfolios are designed to benefit from the basic premise that different asset classes tend to perform in different ways in a variety of market conditions. For example, it may be the case that when there are losses in one asset these may be offset with gains in another. Shorter-term volatility in investment markets can seem sudden and even worrying, but for longer-term investors we believe it is important to avoid knee-jerk reactions and remember the benefits of having a diversified portfolio that looks to the long term.”

I hope the above is helpful but, as always, if you would like to discuss this or any other finance related matter, please do not hesitate to contact me.  

With kind regards,

Yours sincerely

Graham Ponting CFP Chartered MCSI

Managing Partner

Russia and Ukraine

Anyone that watched Putin’s rambling address to his security council last night could not help be worried that such a man appears to be holding the rest of world to ransom at the moment. I hope the following will help put what is going on into a wider context:

Rising tensions over Russia and Ukraine have taken over as the dominant factor driving day to day movements in markets. Yesterday, Russia recognised the breakaway regions of Donetsk and Luhansk in the Donbas region of Ukraine and plans to send "peacekeeping" forces to the area. These areas were already controlled by pro-Russia militias, so this could be seen as confirming the status quo. On the other hand, it will be seen as provocative by Ukraine and its allies. Sanctions will be forthcoming, as evidenced by Boris Johnson’s statement at lunchtime, but for now not on the scale that the US, UK and EU have threatened if it became a full invasion. 

Putin’s actions yesterday caused a drop in equity markets and a rally in US Treasury bonds yesterday afternoon, which continued in the Asian session overnight. The biggest damage (so far) has been in Russia's own equity market with the MOEX index down 17% over yesterday and today (as at 7am GMT). The Ruble has also dropped, meaning the MOEX is down over 20% in Dollar terms. Perhaps this demonstrates that the damage to the Russian economy may be worse than the damage done to the rest of the world. 

An invasion of Ukraine would most likely see oil and gas prices continue to rise and the stock market to fall further. How far and how deep would depend to some extent on how far it goes. It seems unlikely that NATO forces would get involved directly in any fighting. Russia may settle for what it did yesterday, recognising the pro-Russia separatist regions of Donetsk and Luhansk and putting Russian troops on the ground in this Russian speaking region. This would be symbolic but would, as has been said earlier, do little more than recognise the status quo. While this region has a very high ethnic Russian population, a much larger part of Southern and Eastern Ukraine has a majority of Russian speaking population.

Russia's main concern has been the expansion of NATO into what it sees as its sphere of influence, but it has also been keen to support ethnic Russians in Ukraine. This may be the excuse for a full invasion which would be the biggest war in Europe since 1945.

These are dark times and when trying to understand the implications, we tend to look for historic comparisons. There is nothing that compares directly but we have looked at the Cuban Missile crisis of 1962 for US/Russia tensions and the Iraq invasion of Kuwait for oil supply disruption to try and tried to put this into some historic context.

Firstly, we would stress that a de-escalation of the tensions around Ukraine would be best for all parties and diplomacy may yet bring that to the fore. Secondly, today’s circumstances are very different - the Cuban missile crisis threatened a direct confrontation between two major Nuclear powers and the destruction of life as we know it. President Biden has made it clear that direct fighting between the US and Russia is unthinkable and that US forces will not fight in Ukraine. It would result in sanctions which could see Russian oil and gas supplies cut off which is why it is somewhat comparable to Kuwait, which threatened disruption in supply of oil from the gulf.

The Cuban missile crisis took place between 16th October and 20th November 1962. This was after a sustained rally through the 50s when the S&P peaked in 1961, then corrected 27% in what was known as the Kennedy slide - bottoming in June, it started to recover 14%. It declined again but only fell 6% in the early days of the crisis before bouncing back. By September 1963, it was making a new high passing the 1961 peak. The market was helped by JFK who agreed to tax cuts and reduced margin requirements.

The invasion of Kuwait came on the 2nd August 1990. Over the following weeks the oil price rose over 80% and the S&P fell 17%. The S&P gradually recovered only dropping a little ahead of Operation Desert Storm, which when successful saw the oil price fall back, and the S&P recover by the end of 1991. At that time, it was 17% above the level pre the invasion. All of this occurred despite a recession in the US from July 1990 to March 1991. Interest rates were cut from 8% to 4% to fight the recession.

Clearly the time to buy was mid-crisis when it looked bleakest. If you traded out, you probably would have congratulated yourself but would probably not have bought back until the market had bounced. Trading short-term moves is nearly always dangerous. 

Rate cuts on the scale of 1991 are not possible but despite higher energy and agricultural prices, the Federal Reserve would probably be reluctant to raise rates as fast as is already priced into markets. The European economy would be hardest hit being dependent on Russian gas. However, European markets reflect this risk to some extent already. It should also be noted that while the oil price has risen steeply, the futures curve implies that the oil price is still expected to fall back later this year and into next year. 

We all hope that the Russians see the potential economic damage and that the diplomats find a way through the present crisis as they did in 1962.

What I am essentially saying is that it is usually unwise to try and ‘time’ markets when these things happen, and they do happen with some frequency over an investing lifetime. As with the examples above, history shows us that sitting tight has ALWAYS been the best strategy in the past, trying to time when to come out and just as importantly, when to go back in, is devilishly difficult; those that have done it successfully have probably just been lucky.  As an example, following the news last night, a betting man would probably have expected the FTSE 100 to heavily fall this morning but at time of typing (14:50), it is actually up 0.23%.

This current bout of geopolitical tension will eventually pass, just like the Cuban Missile Crisis, just like the Gulf War and just like COVID, we just have to be patient.

As always, if you would like to discuss this or any other finance related matter, please do not hesitate to contact me.  

With kind regards,

Yours sincerely 

Graham Ponting CFP Chartered MCSI

Managing Partner