ICR060: Investing & intergalactic travel: insanely complicated & sometimes resulting in panic
Don’t panic is the well known phrase on the cover of The Hitchhiker’s Guide to the Galaxy; a phrase placed on the cover, according to the series, partly because the device “looked insanely complicated” to operate, and partly to keep intergalactic travellers from panicking.
Investing can have a lot in common with intergalactic travel.
It can look insanely complicated, although if often best when kept simple.
Investing, like intergalactic travel, can sometimes result in panic.
Right now, it seems like a good time to remind investors why they shouldn’t panic.
It’s been a lousy start to the year for investors. Fears over the strength of the Chinese economy combined with falling oil prices have pushed down global equity markets.
Yesterday, we had reports in the press that RBS have advised clients to sell everything but high quality bonds.
Royal Bank of Scotland is reported to have warned clients that 2016 will be a “cataclysmic year” for investors.
It is urging its clients to “sell everything” as the “exit doors are small”.
According to a note published by the RBS credit team and seen by the Telegraph, the bank is forecasting a 20% fall in equity markets this year.
The note is reported to say “Sell everything except high-quality bonds. This is about return of capital, not return on capital. In a crowded hall, exit doors are small.”
They believe the current crisis in China will “snowball” and cause a downward spiral in global equity markets.
Reasons to stay the course
With news that like doing the rounds, it is little surprise that some investors are nervous.
Here are some good reasons to ignore the likes of RBS and stay the course.
Firstly, your investment portfolio is diversified.
Not a single client at Informed Choice, or I suspect other firms of Financial Planners or Wealth Managers, has an investment portfolio entirely allocated to just one investment asset class.
Risk management through diversification
Diversification is the most effective risk management tool available to investors.
Being diversified across asset classes means you deal with systematic risks; the risk inherent to the entire asset class.
Because these risks are unpredictable and impossible to avoid, being diversified means you have other investment types in your portfolio which are hopefully non-correlated with the equities and can reduce overall volatility.
Another reason to ignore the noise from RBS is to remember that investing is not a short-term activity.
Maintain your long-term view
Investing only works if you take the long-term view; those who invest over the short-term are speculators, not investors.
Equity markets are often volatile over the short-term.
When you look back at these short-term periods of volatility, they usually appear as mere blips on investment charts.
If your financial goal is coming up soon, then of course your investment portfolio should be positioned accordingly. But for long-term financial goals, stick with a long-term investment strategy.
Time in the markets
Another important factor to consider when investors are fearful is what your response might look like.
Imagine you take RBS at their word, and sell your equity holdings today. What then?
You move your portfolio entirely to cash, or indeed to high-quality bonds as RBS is recommending to their clients, but at some point you will want to get back into equities.
The ability to accurately and consistently make the correct market timing decisions is one of the biggest investing fallacies there is.
The experts often get it wrong, and missing only a few days of the best equity market performance is enough to dramatically reduce your long-term investment returns.
You risk selling low and buying high.
We have seen this time and time again; what counts is time spent in the market, not market timing.
The Sage of Omaha
Investors who avoid the panic and focus on their long-term goals with suitably diversified portfolios will always do better than those who make knee-jerk reactions and attempt to time the markets in the short-term.
As the great Warren Buffett once reportedly said, “Be Fearful When Others Are Greedy and Greedy When Others Are Fearful”
When investors are in a panic, it is rarely a good time to join that crowd and panic along with them.
If you have the capacity, appetite and need to take more risk, then investment market fear can prompt a buying opportunity for a spot of ‘greed’.
Do speak to your Financial Planner if you have any concerns whatsoever about current market events and commentary.
One way we earn our money is to guide our clients through periods of short-term market volatility, and indeed fear, helping you stay the course and achieve the right long-term results.