Some investors are getting nervous as stock markets here and in the US bump around their all-time highs. Newspaper reports are beginning to speculate that a correction may be around the corner and we are receiving increasing numbers of queries from clients about what this means for their investments.
Is that true? Is it better to stay put and ride out the peaks and troughs or try and move into and out of rapidly fluctuating markets?
The answer is somewhere between the two. We were pretty pleased by the decisions we made surrounding the 2008 financial crisis, by which I mean that we were underweight equities in 2008 and overweight equities in the sharp recovery of 2009. We didn’t, however, completely sell out of stocks in 2008 because while the balance of risks was tilted against them, any number of actions by policymakers could have meant the rally came earlier. Anyone who has too much cash when the stock market rallies will realise the immense damage that does to their financial ambitions.
For example based on our analysis of the Wealth Management Association’s (WMA’s) balanced portfolio, and working backwards over the past 20 years, it is clear that staying invested - even around deeply troublesome periods for the market – remains the best tactic over the long term.
Missing only the best 5 days in the market in the past 20 years would have led to a 23% lower overall return. Missing the best 10 days would have reduced returns by a staggering 40%.
Conversely, missing the 20 worst days would have led to double the returns of staying invested all along.
So we are always looking to take decisions which should enhance the return you receive over time from your portfolio. But, equally, we recognise that it is all but impossible to time the market so perfectly, even with the best forecasting skills. So we ensure any misjudgements we make don’t jeopardise your investment objectives.
How do we apply that now?
What we can say is that large corrections, or severe bear markets, are usually associated with US recessions. And while recessions are relatively hard to foresee, we do have indicators which we use to forecast roughly when they are likely to occur.
Currently, our analysis suggests that the US is relatively late in its economic cycle, but is still two or three years away from a recession. Although we expect a mid-cycle slowdown this year, it is likely that there is time to profit ahead of any big downturn. Indeed, historical analysis shows that some of the best years to invest are just ahead of market highs.
As you can see from the table the best year to invest in the past 20 years was 1998, just a year before the FTSE 100 peaked, two years before the infamous tech crash of March 2000, and three years before the deep recession starting in 2001. All of which means that you need to be incredibly accurate with your timing to make selling out of the market worthwhile. Indeed, even those who invested in 2000, when the market crashed, would have seen their money more than double.
Looking at the more recent bear market surrounding the financial crisis in 2008, once again, you would need to have been incredibly prescient to time investments correctly. The best year to invest was 2009, when the market bottomed, as you might expect. But it was only marginally better than investing in 2006 and remaining invested, even though this was just a couple of years before the crisis and only a year before the credit crunch began.
Rest assured our experienced analysts are constantly monitoring the market and economic data, looking to make some judgement calls to move money from one asset to another to capitalise on market sentiment. This tactic has served us well and we have outperformed our benchmark index in 11 out of the last 13 years, through judicious use of our award-winning research and asset allocation strategies.
Right now, therefore, we judge it to be better to stay invested, and allow our investment managers to snap up undervalued shares or switch into alternative assets on a selective basis - as and when market conditions permit - to squeeze extra returns out of our portfolios.
By Guy Foster, Head of Research Guy leads Brewin Dolphin’s Research team ensuring that a rigorous and exhaustive investment process is employed. He also provides recommendations on tactical investment strategy to Brewin Dolphin’s investment managers and strategic recommendations to the group’s Asset Allocation Committee. Before joining Brewin Dolphin in 2006, Guy was an Investment Director at Hill Martin (Asset Management). Guy has a Masters in Finance from London Business School. He is also a CFA charterholder, holds the CISI Diploma, and is a member of the Society of Business Economists. Guy frequently discusses financial issues with the written and televised media as well as presenting to the staff and clients of Brewin Dolphin.
The value of investments can fall and you may get back less than you invested.
Past performance is not a guide to future performance.
The information contained in this document is believed to be reliable and accurate, but without further investigation cannot be warranted as to accuracy or completeness.
No investment is suitable in all cases and if you have any doubts as to an investment’s suitability then you should contact us.
If you invest in currencies other than your own, fluctuations in currency value will mean that the value of your investment will move independently of the underlying asset.
The opinions expressed in this document are not necessarily the views held throughout Brewin Dolphin Ltd