29 March 2019
By John Husselbee, Co- Fund Manager HC Verbatim Portfolio Growth Funds
Politically speaking, recent years have been among the most divisive and volatile in decades – with Brexit, Donald Trump taking the White House and a swathe of populist parties wining power around the world.
And yet, for the most part, stocks markets have charted an upward path against this backdrop, breaking and re-breaking records for all-time highs several times over.
For me, a major impetus behind this has been what we call FOMO investing – and for those not up to date with their text acronyms, that means fear of missing out. This is basically the feeling of anxiety that an exciting event may currently be happening elsewhere: what drives people to move into the other, apparently faster-moving, supermarket queue or motorway lane.
As everyone knows, such action often results in that new queue grinding to a halt and the one recently vacated starting to move. And while switching queues might only end up costing a few minutes of time, such ‘grass always greener’ tendencies can prove extremely damaging for long-term wealth generation.
Patience is a cornerstone of our philosophy but, given the sheer amount happening in the world at present – and the 24-hour news cycle fanning the flames – it is easier said than done: and strong results from many equity markets in recent years have clearly tempted many into faster-moving queues.
To be clear, we are not saying equity investing is the wrong way to go: equities have clearly outperformed cash and inflation, and form the bedrock of a well-diversified portfolio as the main driver of long-term returns. Another similar acronym is enough to encourage investors into equities – FOLO, or fear of losing out – with inflation eating into the value of assets held in cash.
Data on the FTSE 100 makes the attraction clearer: looking at returns going back to 1986, a one-year investment in the index at any point gives a 76% chance of a positive outcome at the end of that period (although it is important to stress the maximum possible fall has been around 50%).
As would be expected, the longer people are prepared to commit capital, the greater chance they get of a positive result, and a 20-year investment during the period has always yielded a positive return.
Problems can come when investors attempt to pick between equity markets and again, some basic stats bear this out. $100 invested in the MSCI World Index just after the Lehmans crisis in 2008 would be worth around $200 today, despite a near 50% fall in the immediate aftermath. If you tried to pick a market however, $100 invested in the MSCI USA Index would now be worth around $250 while the same amount in the MSCI World ex-USA would have given you around $150.
Considering investment options back in 2008, it would have made sense to avoid the epicentre of the sub-prime crisis and focus on parts of the world enjoying cleaner balance sheets – and these is exactly the kind of difficult questions investors have to face if they try to pick markets. The MSCI World, a proxy for a broad equity portfolio, charts the middle path between these: not the worst or best but a solid end return without FOMO panic.
A further layer of complexity comes when people try to time their moves into and out of markets: over the years, even the greatest investors have got this wrong more than right.
As we have said, over the long-term, equities have outperformed and we believe the best way to approach this is to imagine returns as a straight line moving upwards, from bottom left to top right on a chart. Of course, returns are not linear like this and there are plenty of ups and downs along the way but if you practice what we call noise-cancelling investment, the result has been strong performance.
The alternative, often driven by the dreaded FOMO, is to focus too much on the volatile reality of markets and investing according to daily ups and downs can risk falling into irrational behaviour and making costly mistakes.
For us, a properly diversified multi-asset fund can take these FOMO concerns away but this should not be taken to mean aggressive shifts into and out of asset classes: asset allocators often talk about the freedom to zero weight certain areas as a sign of an ‘active’ approach but we feel this fundamentally misses the point.
As Harry Markowitz – one of the pioneers of modern portfolio theory – said, diversification “is the only free lunch in finance.” While it might be uncomfortable to hold a falling asset, something else is likely to be rising at the same time and it is the overall blend that helps produce a smoother performance ride over the long term. Zero weighting completely throws that out and, again, runs the risk of pandering to FOMO tendencies.
Our multi-asset approach is target risk, meaning each portfolio is run within predetermined volatility bands and strategic asset allocation (SAA) is designed with those targets in mind. While we look to add value – and maximise returns within those boundaries – via tactical allocation and fund selection, our portfolios are built specifically to avoid FOMO-type investing.
Our SAA will change each year to meet volatility targets but you will never find aggressive shifts into rising markets: on the contrary, we usually want to be adding exposure to areas that have done less well and are therefore cheaper, in line with a basic buy low, sell high philosophy.
Ultimately, our core message is that limiting losses as well as generating gains – what we call winning by not losing – rather than chasing gains and fleeing losses, has proved an efficient way of building performance towards meeting financial goals.
John Husselbee is the co-fund manager for the HC Verbatim Portfolio Growth Fund range, part of the Verbatim range of risk-managed multi-asset investment solutions. To find out more about Verbatim visit www.verbatimassetmanagement.co.uk or contact us on 0808 12 40 007.
The value of investments and any income from them can go down as well as up and is not guaranteed. Your clients could get back less than they originally invested. Past performance is not a guide to future performance. The portfolios' investments are subject to normal fluctuations and other risks inherent when investing in securities. Verbatim Asset Management has taken due care and attention in preparing this document, which is solely for the use of professional advisers. Verbatim cannot be held responsible for any inaccuracies arising out of information detailed within and will not accept liability for any loss arising out of or in connection with its use. This article is for information only and should not be deemed as advice.