Looking at the headlines over the last two years, you could be forgiven for thinking that investors have experienced poor returns. It has been a rocky ride for sure as the trade dispute between the US and China has escalated, the chances of a no-deal Brexit have risen with the rise of Boris Johnson, and more recently the protests in Hong Kong threaten to undermine an important financial hub for China. All this should surely point to poor returns for investors?
On reviewing returns though, we have found investors had done reasonably well over this period. Both European and American shares are up over the twelve months to the end of August, and investors in other asset classes like government bonds and gold have done well. The Irish stock market, however, has lagged more recently, affected by the ongoing uncertainty being played out in the House of Commons.
While the headlines fill airtime or newspaper columns, they may be full of little other than short-term concerns. The truth is that heightened political risk often does not translate into lower market returns over the medium term. This is not to say that issues like US-China trade tensions or Brexit don’t matter, they do. Triggers for market uncertainty can come from a variety of macro-economic factors such as interest rates, inflation, unemployment and economic growth. One thing we can be certain about when investing is that there will be volatility.
It is easy for investment professionals to say downturns are normal but that doesn’t make them any less uncomfortable for those invested. History shows us time and again that equity markets have the ability to recover from declines and provide positive long-term returns. Fidelity has shown that over the last 35 years, the US stock market has experienced an average drop of 14% from peak to trough each year, but still had positive annual returns in more than 80% of those years within timeframe. While googling ‘strategies for uncertain times’ will generate vast number of articles providing tips, the biggest takeaway from any article should be: keep your perspective and know what your end goal is.
So if you are looking for tips on how to grit your teeth and invest even when the outlook seems so uncertain, here are my top three simple tips below.
- Time in the market, not timing the market
Avoiding the temptation to time the market is perhaps the most important lesson for investing in uncertain times. If you could avoid being invested on the bad days and fully invested on the good ones, you would be greatest investor of all time. The problem is, it is impossible to consistently predict when those good and bad days will happen. American Century Investments have shown the effect on portfolios by trying to time markets and the effects on valuation by missing the strongest days within a period. Their analysis highlighted staying invested throughout a cycle resulted in the best return for long-term investors.
Investors in shares benefit from both capital growth and dividends, with dividends simply the share of profits a business pays out to its shareholders. Over time, the contribution of reinvested dividends to your total return can be substantial, sometime contributing more than half your total return. Trying to time the market, or buy low and sell low, means you miss out on the power of reinvested dividends.
- Diversify your investments
Diversifying your investments can shield you from some – though by no means all – of the risks of investing. Spreading your assets across a range of companies, countries and markets reduces your dependence on any one area, and the risk of one bad event making a dent in your portfolio. By investing in a range of asset classes, you can produce a portfolio which has smoother returns over time, and include exposure to assets which tend to perform well during times of uncertainty, such as gold or government bonds.
- Don’t forget the cost of not investing
People tend to see investing as a binary thing, where you are either doing it and taking a lot of risk, or not doing it and not taking risk at all. The truth is more complicated. By not investing, you run the risk that your money will decline in value as inflation erodes away at your wealth. The cost of things around you will rise over time, but with banks offering a meagre level of interest, your money will not keep up and will not be able to buy as much for you in future.
But what happens if you invest before a market crash?
Having said all this, I know people still tend to look at me at this point in the conversation and want to know what happens if I do pick a bad time.
So let’s assume the worst and look at what would have happened if you only ever invested before a market crash. One of my colleagues has done just this for UK shares, running the numbers to see what would happened in you invested at the market peak right before the Asian Financial Crisis (1998), bursting of the dotcom bubble (2001) and financial crisis (2008).
After those three peaks, the UK market saw declines of 25%, 30% and 40%. You would be feeling pretty sick after that. But if you had invested equal amounts right before those three crashes, you would have doubled your money by the end of 2018. You can run the analysis for US shares and reach a similar conclusion. Even if you invest right before a market crash, staying invested over the long term tends to pays off.
I am not going to sit here and tell you this that this is the best time to invest. If that were the case, everyone would want to part with their money and I wouldn’t have time to write this article because I would be tripping over clients.
Investing in uncertain times requires us to recognise that our long-term financial needs are not going away. The need to save for a pension, your children’s education or any other financial goal, does not generally disappear overnight. Keeping that in mind should help to make investing in uncertain times easier, even when we are watching the latest news report. How to invest in uncertain times? Make a plan, and stick to it.
Author: Eoin McBennett, Investment Manager at Quilter Cheviot, https://www.quiltercheviot.com
Investors should remember that the value of investments, and the income from them, can go down as well as up. Investors may not recover what they invest. Past performance is no guarantee of future results.
Any mention of a specific security should not be interpreted as a solicitation to buy or sell a specific security.