Spring is here, the weather is getting warmer and the sun is making an appearance again at last, even here in Manchester. Green shoots are appearing not just in the garden, but in a broader sense in terms of the economy and the return of our social freedoms.
The vaccine roll-out appears to be going well (Astra-Zeneca controversies notwithstanding) and whilst clearly there is some way to go before we get back to what can be considered ‘normal’, there seems to be a collective sense of optimism as we speak to our clients.
Contrast this with the situation twelve months ago. What was first thought to be another contained regional virus, was fast becoming a generation-defining global crisis. People were understandably frightened. We had just entered lockdown here in the UK, with no clear idea of what it would mean, whilst global stock markets were going over the edge of the cliff….
As investors, what can we learn by reflecting one year on from the beginning of lockdown? And, as we move into spring and the nation’s mood appears to be lightening, what might 2021 have in store?
Before we dive in, I must just stress that investments carry risk and their value may fall as well as rise. There is no guarantee you will make a return and you may get back less than you invest.
This week marks the first year anniversary of the first UK Covid lockdown. What a difference a year makes.
Industry peer Andy Hart at Humans Under Management recently posted some pictures of newspaper headlines from March 2020 in his own newsletter. They are such a glorious caricature of mainstream media market-crash reporting, that I couldn’t resist the urge to share them with you too.
Ah yes, the tried and tested newspaper doom-monger recipe. First, lead with pictures of stressed stock market traders clutching furrowed brows. I often wonder if these guys give their permission for their mug shots to adorn the front covers of the newspapers? Or do they find out from friends or family? ‘Hey Steve, did you know you’re on the cover of the Independent today?!’...
Now sprinkle in plenty of sensationalist language. ‘Plummet’. ‘Crash’. ‘Panic’. ‘Biggest losses since *insert last crash here*’. Excellent.
Then round off by telling us that this time is DEFINITELY different to every other market crash and we’re all doomed to lose our pensions and life savings. Voila!
One of my favourites is ‘BILLIONS WIPED OFF WORLD STOCK MARKETS!!!!’. It’s funny that you never see the press talk about the billions that get wiped back ON to stock markets when recoveries kick in, or the billions more that long term investors can collectively accumulate over years of disciplined stock market investing, even taking the ups and downs into account.
Usually the best years returns follow market crashes and this is no different.
Depending on where you sit on the risk/ reward scale with your Wetherall’s portfolio, twelve month returns for our clients look something like this (these are net of our charges):
Defensive: 12.7%
Cautious: 19.6%
Balanced: 24.5%
Active: 30.4%
Aggressive: 36.1%
Global Equity: 38.4%
However, before you get too excited, we need to put this in perspective. Just like measuring a market crash from just the top to the bottom doesn’t tell us much, it’s the same story here. We’re measuring from a very low baseline, i.e. the nadir of the Feb/ March 2020 correction.
So what about if you had just dropped a lump sum into a portfolio on the first day of 2020, back when face masks were worn mostly by surgeons, toilet paper was in abundance and there was barely a cloud on the investing horizon? The scores on the doors for fifteen month performance look like this:
Defensive: 4.3%
Cautious: 5.3%
Balanced: 5.6%
Active: 6.4%
Aggressive: 6.9%
Global Equity: 15.8%
Okay, so not quite as exciting (unless you’re fully invested in global equities). However, still an outstanding result given that the time period contains such a sharp market crash.
So, what are the learning points we can take from this as investors? Well, it just underlines the same key principles that we apply to investing your money and our own. At the expense of sounding like a broken record…
1. Keep your head whilst those around you (and the media) are losing theirs. How do you make a small fortune? Invest a large one, panic, then sell out of the market during a crisis. Imagine selling all your investments and moving to cash in March 2020 and then having to buy back in now. Ouch. Just as you wouldn’t rush to sell your home and move to rented accommodation if the housing market temporarily crashed, when it comes to your long term investments, keep calm and carry on. With a little time, normal service (and returns) will resume.
2. It’s the sale of the century! Okay, maybe not the century, but definitely ‘the decade’. If you’ve got spare cash to invest and a long term time horizon, a correction or market crash is a good time to top up. The things we love just got marked down in price – buy now while stocks last. Whilst not all of us are fortunate enough to be roosting on large piles of liquid cash ready to invest, if you’re making regular monthly contributions to ISAs and pensions, then you’re still benefitting from this. After all, there is nothing quite like a monthly standing order to enforce disciplined investing during a scary market. Even if you’re already fully invested and not paying in, our portfolios automatically reinvest any dividends received, so there are still benefits to be had, provided you remember the next point.
3. Patience is a virtue. Or as the old Guinness adverts used to say: ‘Good things come to those who wait.’ Stock market exposure and a long term time horizon drive strong returns. ‘Time in the market’, as opposed to ‘timing the market’. Conversely, jumping in and out of asset classes and trying to make a quick buck creates binary outcomes, which can result in large gains, but also large losses. Or to use another phrase that many of you have heard us talk about, the dreaded ‘permanent destruction of capital’. Personally I’d rather see my capital fluctuate in value in the short term, but appreciate steadily long time, than risk it’s permanent destruction. A diversified portfolio and a long term view pays dividends. Both literally and figuratively. Now that’s not to say you can’t have a few satellite shareholdings that you speculate on of course. If a good portion of your money is invested in a professionally managed portfolio, you can potentially afford to take a higher risk with a smaller chunk of your money, if you have an interest in share trading yourself. But even here the same rules apply; a ‘buy and hold’ strategy is often safer than a ‘buy and sell’.
It’s a testament to the experience and discipline of our own clients, plus the reassurance that a fully stress tested financial plan provides, that barely anyone flinched when markets took a temporary tumble last year.
So as Jamiroquai once sang; ‘where do we go from here?’.
Well firstly, whilst I’d love to be proved wrong, don’t expect another 12 month period of investment returns like the last.
We’ve come a long way in the past twelve months, however there are still plenty of headwinds that could knock the recovery off track and create more turbulence in global stock markets. Delayed vaccine rollouts in Europe, the virulence of new strains of Covid and the potential further extension of lockdowns, could all hamper the momentum of the recovery of both investment markets and global economies.
Inflation in the UK is also a hot topic at the moment. It seems safe to expect that many of the things we love as Brits; holidays, home improvements and eating out, will all get more expensive. However, it seems more likely that this will be a short term phenomenon as we begin to leave lockdown, largely driven by the release of pent-up demand from consumers and the imbalance between demand and supply. It looks likely once this normalises and people have got their spending frustrations out of their systems, that inflation will fall back to normal levels.
Whilst many global stock markets are now looking somewhat expensive (i.e. values are high), with some such as the US reaching new record breaking levels, there remains a sense of cautious optimism in the investment community. Vaccine rollouts are likely to be the key that unlocks the return to our social freedoms. Huge global stimulus packages have been announced, many of which have not yet had chance to get into gear. Meanwhile, Brits are sitting on billions of pounds of pent-up savings, after a year of not being able to spend, eagerly waiting to deploy them as things get back to normal. All this has the potential to further boost investments over the mid-term to longer term as the Covid saga continues to unfold.
As usual, whilst we continue to monitor and assess developments in the global economy, as investors and investment advisers, we don’t get too distracted by market noise. We stick to the same principles of a diversified portfolio and a long term view, managing your money with the same care and attention as we do our own.
With that I’ll close for now and wish you a pleasant weekend. I think it’s almost time for that pint of Guinness…
