Investment approach in turbulent times
We’ve seen some difficult markets over the past three months.
On August 8, for example, the FTSE 100 index stood at 7776, but, at the time of writing, it was down to 7059, a fall of more than 9%.
Nobody likes to see 9% wiped off the value of their investments in three months and this kind of volatility can worry some investors, particularly those who’ve only experienced the last nine years of largely unbroken growth in the markets.
But, these kind of falls are normal, stock market volatility is normal, and, when it comes to investing, some element of risk is normal.
Take Reeves’ portfolios. While the overriding result has been one of positive investment returns, over the past three years, or 150 weeks, in a third of those weeks, our portfolios have gone down in value, so that we’ve averaged one week down and two weeks up. These ups and downs aren’t spread out evenly in a regular pattern.
Over the longer term, you will expect to make a positive return, but the rate of growth won’t be a steady gradient, it will happen in bursts and you can’t predict when those will be. In the UK, people expect the value of their house to rise over time. Just as their house was worth considerably less 30 years ago, so they can expect, with reasonable confidence, that it’ll be worth considerably more 30 years from now. However, they couldn’t say with any confidence that it’ll be worth more a year from now or even five years and certainly not by how much. It’s also perfectly possible that while the value of the house will rise over 30 years, on the way, it could go through periods of slump when prices fall.
It’s the same with investments. If we look at Reeves’ portfolios over the last three years and the one week down, two weeks up average, there have been periods of longer losses and, in the longest losing run, our high risk portfolio fell by 15%.
That underlines another truth about investment. Not only is volatility inherent in the whole process, so is risk. Sometimes the people who take the biggest risks get the bigger gains but, at the same time, these are the people who are exposed to the bigger losses. Everyone wants higher returns but classifying yourself as an adventurous investor doesn’t guarantee you those, it only gives you a greater possibility of achieving them.
You have to take some form of investment risk to make your money work for you.
People who don’t like volatility or risk can keep their money in cash, which may be safe. You can’t have safety and gain, there’s a spectrum and the further along it you travel in the direction signposted risk, the more you open up a greater range of outcomes – you expose yourself to making greater gains, but also greater losses.
At Reeves, we discuss risk and your capacity to loss to determine what level of risk is most appropriate to your temperament and circumstance, and we can advise you when the state of the market makes it sensible to adjust that level. We also structure our portfolios to spread risk and anticipate market swings.
But, the fact remains that market ups and downs and risk are part of the investment process and always will be.
It is important that no actions should be taken without first taking advice. Personal circumstances and an individual's appetite for risk means that the advice for one person may not be the same for everyone. The information in this blog or any response to comments should not be regarded as financial advice. Please remember that the value of your investment can go down as well as up, and may be worth less than you paid in. Information is based on our understanding at October 2018.