Glyn Chetwynd – Technical Analyst
As investors it would be understandable, and quite normal, to be concerned about how markets are behaving during these early months of 2020.
If one phrase should be the used again and again, it would simply be ‘Keep Calm and Carry On’. But as humans, who have emotions and feelings, keeping calm is not always that easy.
Ensuring we, at Longhurst, keep both hands on the tiller that is your beautifully crafted financial plan, my note today is to provide you with assurance and calming news in the form of the key themes we follow when constructing investment portfolios.
Diversification Manages Risk
We construct our portfolios to generate returns in a wide range of market conditions; by holding defensive asset classes such as bonds; and by spreading your wealth over a range of equities shares in different countries and market sectors.
This is otherwise known as Strategic Asset Allocation, which is a tried and tested investment strategy to manage risk. We do this because it reduces the price movement in your portfolio (i.e. risk), using something called covariance (which is the relationship between the price movements of each asset class).
This approach maximises returns whilst minimising risk.
Market Corrections are Normal and Short Lived
Equity markets are displaying textbook behaviour.
By this I mean we have a clear view of what is happening and how to navigate these risks and what to expect.
Essentially, we have seen a period of low volatility followed by a period of high volatility late in a business cycle. As investors you should expect this volatility to cluster and occur with more frequency in the short term as people close out positions and re-open new ones.
Generally, most market corrections are short lived affairs as the government (as we have seen) moves into support the economy by buying assets, spending money, or creating debt which companies can use as collateral to access loans or support their financial position.
Therefore, the best strategy in this situation is to ride it out.
The worst strategy in this situation would be to make a knee-jerk reaction.
A Steep Equity Decline is Not a Surprise
The steep price decline in equities is not a shock. This is because stock markets have been at a high point (based on the GDP to Market Cap ratio) due to positive long-run economic news, supported by loose non-normal government monetary policy (which created a foundation for this growth).
Thus, a steep decline from a high point is not surprising or new, as markets overstate themselves (at positive or negative levels), which is what is happening now.
In fact, investors have enjoyed many years of strong growth. As investors we can sometimes become too focused on the market today, when in fact we should be looking to the future.
Please remember, as investors you have time on your side. The markets and the economy will recover and be more robust for this experience.
Time & Information
The deluge of information we receive in relation to this virus or markets is overwhelming. Even we at Longhurst feel that.
It is important to remember that headlines are designed to capture our attention by creating a basic emotive response (usually anger, happiness or fear).
However, the news only captures a moment in time; a moment that has passed; when what really matters with investments is the future; the point at which we need to sell or access the asset.
However, if you are concerned about your retirement or your investments please be assured that we have been in these market situations before, and we will experience them again in the future (if the past is a good indicator).
Because of this we have a deep knowledge and experience of how to risk manage during extreme market conditions, and it is this knowledge and belief system which will see our clients ride out the current market situation.
It is important to remember that markets recover; economies recover; and that positives will emerge from this situation – even if you can’t see them yet.
So, please do not let the headlines from the Negative Event World Service (News) distract you from looking to the future.
And please know that our primary goal has, and will always be, to provide trusted stewardship to your wealth and financial interests.
THE VALUE OF INVESTMENTS AND THE INCOME FROM THEM MAY GO DOWN. YOU MAY NOT GET BACK THE ORIGINAL AMOUNT INVESTED.