17 December 2019
By John Husselbee, Co-Fund Manager HC Verbatim Portfolio Growth Funds
Working in finance, I wonder how many of you have had a similar experience to me over the years. Sitting on the beach in summer perhaps or at a party, you strike up a conversation with fellow holidaymakers or guests and talk eventually turns to your line of work. Answering finance or investment typically leads into lengthy discussion about your new friends’ portfolios and the best investment opportunities of the moment.
My answer to such questions – and a central theme of our multi-asset proposition – is that there is no ‘best’ investment for everyone at any point in time: when it comes to personal finance, the operative word is personal.
Someone’s best investment will always depend on their goals, attitude to risk and so on, which is why the know your client work done by advisers can be such a key part of the investing experience.
As anyone who has attended one of our presentations can attest, a large part of our process is about what we call winning by not losing, but beyond the headline, what does that actually mean? In practice, we are more than happy to be the tortoise rather than the hare when it comes to that particular fable. And given our concerns about just how much noise there is in the market at present – particularly as the Brexit situation rumbles on and we head into a US election cycle – perhaps a tortoise wearing noise-cancelling headphones.
Changing sports from track for a moment, any football fan will be familiar with the term parking the bus, originally used by then-Chelsea manager Jose Mourihno to criticise Spurs’ defensive approach to a game back in 2004. Of course, that particular stick has been used to beat Mourihno many times since as his teams have frustrated more attack-minded opponents, but his advocates point to how such a defensive mindset has been the bedrock of many title-winning campaigns (of particular interest to me now he is at the helm of my team, Spurs).
In fund management terms, parking the bus means we focus as much on limiting losses as we do on producing gains across our portfolios and that can be seen in how we have performed during some of the bigger market selloffs of recent years.
When building an investment portfolio for a client, his or her attitude to risk is a central consideration: asset allocation should be determined as much by how much someone is prepared to lose as by how much they want to gain. Some risk will always be necessary to achieve returns but taking on too much at the wrong point in life can be damaging for financial health.
Without delving too deeply into the murky waters of behavioural psychology, there is a common trait among people known as loss aversion that feeds into this. Put simply, we tend to prefer avoiding losses to acquiring gains and the pain of losing £1 is generally seen as more powerful that the pleasure of winning £1.
A famous experiment illustrates this point, where subjects are offered two gambles with identical payoffs, but framed differently. In the first, a coin is flipped and if it lands heads the person gets £100; if tails, they get nothing. In the second gamble, the person is given £100 first and then flips the coin: if it lands heads, they owe nothing; if tails, they pay back the £100. Subjects tend to dislike the second experiment much more than the first even though the gains and losses are identical.
Ultimately, the evidence of history points to the importance of investing for the long term and staying invested through the ups and downs of markets and political events. Winning by losing over a long period, rather than chasing gains and fleeing losses, has proved a good way of building performance towards meeting ultimate financial goals.
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.