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Are Things Fundamentally Different This Time?


Keep Calm and Carry On?

Murray has been reflecting on lessons learnt from the Credit Crunch crash, here he offers some excellent advice:

Keep Calm and Carry On! – or so the now over-used slogan of the 1939 pre-World War II British Government motivational poster puts it.  This is a sentiment being conveyed by our current Government, in what is potentially the biggest present threat to our global society since then.

Those of you who have been clients of ours for a long time are used to our version of this message when it comes to investing.  At times of previous crisis, we have encouraged you to focus on the long-term, rather than be distracted by the short term noise and to stay invested, rather than to switch out of investments temporarily and switch back later when things have apparently settled down.

Evidence from past crises suggests that whilst a few people achieve success in adopting such a market-timing strategy, most don’t as they switch out too late to avoid significant falls in value and switch back in too late to benefit from the recovery that happens when things once again start to improve.   At the same time there is also evidence to suggest that just being disinvested for just a few significant days, when markets go up in value can be detrimental to the recovery of one’s portfolio.  So, as we have often said to you, provided you can take a long-term perspective on your investments, it does seem to be true that: ‘it’s ‘time-in’ the market not ‘timing’ the market which matters’.

‘That’s all very well’, I hear you say ‘but aren’t things fundamentally different this time?’

The honest answer to this is that they might be but we don’t know for sure. Here’s some of what we observe right now:

  • The path of the virus is unknown – specifically, the scale of the epidemic, whether or not it will recur following the initial outbreak and whether or not a vaccine can be created, so the true strength and depth of the crisis cannot be foretold at this point;
  • The financial institutions (central banks and clearing banks) are by and large more robust than they were at the time of the 2008-2009 financial crisis, which is a good thing;
  • Unlike the response to the financial crisis, in general governments seem to have been responding unilaterally to the Coronavirus. That being said, this week has seen the announcement of a raft of financial aid by the UK Government to shore up the economy, which is similar in scale to other developed countries.  Other announcements from the UK Government are set to follow;
  • Clearly human activity and its economic effect is substantially down and reducing further as governments place further restrictions on their populations;
  • Some types of business seem set to face real cash flow issues and in spite of the new financial aid measures some may still founder;
  • Because of factors like these the long-term prospects for the markets are even more difficult to predict than usual.
  • Markets hate uncertainty and because the world is grappling with a fluid and rapidly changing and uncertain situation we are seeing extreme but predictable volatility in global stock markets – and this is likely to continue.

So in the face of such uncertainty, how should we all respond?

Without  wishing to trivialise the scale of the difficulties the world now faces, we should start by saying that to some extent uncertainty always forms the backdrop to investment decision making, or to put it another way:  ‘Economic uncertainty is certain’. In the face of this reality when we have met with you to review your financial planning, we will have encouraged you to do a number of things:

  1. To maintain sufficient cash reserves in a bank account for liquidity – in the short-term this reduces reliance on the more volatile elements of your portfolio (if you have any concerns about whether or not you have sufficient cash then please get in touch);
  1. For the long-term – take a more strategic approach by allocating your portfolio to a blend of assets which matches your return requirements and your risk profile. In general you should only maintain a high proportion of shares and other more riskier assets in your portfolio if you have a longer time-horizon or a higher risk profile (if you have any questions about the asset allocation of your portfolio then again please get in touch).
  2. Diversify in a number of ways to reduce risk (this is equivalent to not having all of your eggs in the one basket). For example we typically diversify in the following ways:
    • across different asset classes (such as shares, bonds and commercial property);
    • across different fund managers;
    • across different underlying stocks.

Whilst no strategy can immunise you from any lasting damage to the world economy, these steps should prevent you from having to make market-timing decisions which could prove costly and they provide a multi-faceted approach which stands the best chance of success over time.

We are continually monitoring our model investment portfolios. Whilst those portfolios with higher proportions of shares are obviously more affected by the recent falls in stock markets, encouragingly, we are seeing that all our model portfolios are showing resilience when compared to the falls in stock markets.

Throughout the coming days, weeks and months we will remain available to you to answer any queries and concerns you may have, so please do contact us if you wish to discuss any of the issues raised in this article.

Murray McEwan

18 March 2020


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