Invest with confidence: A calm path through uncertain markets

Investing is a ‘get rich, slow’ process. However much we would all like to get rich quickly (or stay rich), the reality is that investing is a long-term and boring process that uses the power of compounding across time to magnify the two steps forward, one step back journey that participating in the markets can result in.

Most people are now very aware of the damage that inflation can cause, having gone through the high inflation of 2022 and 2023.  Let us look at a very simple, yet powerful example of how money has been reduced in value.  The example is self-explanatory.

The Impact of inflation

The rise of the internet and online media gives us an unlimited supply of opinions and hindsight-based information about what has happened in the past.

In the media, much of what is called ‘investment’ is not investing but is more akin to gambling. These speculative activities include trying to pick ‘winning’ stocks, attempting to time when to be in or out of the equity markets, chasing the latest star fund manager or ‘hot market’ of the moment.

Good investing is about owning a sensible, highly diversified, low-cost and stable portfolio, put in place for the long term, and which is rebalanced back to its original mix from time to time. It is also about having the fortitude to keep ‘on message’ when the markets feel extreme on both the downside and the upside.

At its very simplest, there are only two things that you can do when investing your money.

The first is to become an owner (or part-owner by holding a share) in a company or an asset, such as a property.

The second is to lend your money to someone, be it an individual (not usually recommended), a corporation or a government.

The features of both are shown below.

Participate in the rewards of capitalism

The graphic below shows the price movements over time of Stocks (owner) or Bonds (lender).

As can be seen, the higher returns from being an owner come with high volatility, which is why you are also a short-term lender to high-quality borrowers (such as the UK government or strong companies) in your portfolio.

The most critical decision that you will make in your entire investment programme is finding the balance between bonds (defensive assets) and equities (growth assets) that is right for you.

This balance is a consequence of your emotional capacity for taking risks, your financial capacity to suffer losses, and your actual financial need to take risks. This is an area that any good adviser spends considerable time discussing and evaluating with their clients.

Refining exactly what you should own, and to whom you should lend, takes some insight, but is simply an important finessing of this initial portfolio decision by your adviser. It ensures you strike the right balance between ownership and lending (equities and bonds) for you.

The future is uncertain, and nobody has a crystal ball that can accurately predict what it holds. This is never truer than in the investment markets. Placing all of one’s investment eggs in one, or just a few, baskets makes little sense.

Diversification is simply good practice and should be employed widely in any investor’s portfolio. When we look at the performance of the asset classes we use, who is at the top of the pops or bottom of the class changes every year. We don’t have to try to predict which asset will be best this year – we hold them all.

As an example, you can see that while global property (shown in green) has struggled at times, often appearing at the bottom of the chart, there have been a number of years, 2021 being the most recent, when it is the best performing.

Is your portfolio well diversified at all levels?  Remember that owning a number of funds does not necessarily mean your portfolio is diversified. Look through the fund structure at the underlying investments to see if you are diversified broadly enough.

Human beings have minds that have evolved over time and are poorly designed for investing. Unfortunately, when we are looking at our investments, emotion can often take over, resulting in panic and elation as markets fall and rise.

If the emotional mind dominates in making investment decisions, then investors risk damaging their wealth, usually by buying at the top of rising markets in a state of euphoria and greed and selling out at the bottom in blind panic.

We have shown the graphic below before, and it shows the impact of just leaving your money invested, compared to missing periods when your money is not invested.

Market timing can be costly

Over the last 34 years, investing £1 into stock markets would have grown to £21.44. But if you took your money out and missed the best periods, your return would have been lower. If you missed the best year in that timescale, your return could have been £16.24, almost 25% less.

The chart below shows the resilience of stock markets and their upward path, overlaid with some of the challenges that the world has faced over time.

Believe in the resilience of capital markets

If it looks too good to be true, it probably is. There are no dead certainties in investing apart from the fact that any product that appears to deliver great returns with low risks has a high chance of disappointment, usually in the form of a material reduction in the value of your investment.

If you get excited about a specific opportunity, stand back, take a deep breath and ask yourself where the catch is. We will remind you that return and risk are always closely related.  Ask yourself why, if the opportunity is so great, is someone trying to sell it to you?  Surely, they would keep it all to themselves.

Remember that the investment world is full of great storytellers.

Patience is key

This shows that, given enough time, investments have provided a return above inflation, and we would expect this to continue in the future. Patience is key.

As always, if you have any questions we will be pleased to hear from you.