You Have One Job

Prepare yourself.

I’m not entirely sure that the financial advice community has covered itself in too much glory these past few weeks.

Ever since the election, there have obviously been a lot of sensationalist headlines about what is coming at this Budget.

But that’s the media’s job. They aren’t in the advice business, they are in the engagement business. Attention is the only currency that they trade in.

As fiduciaries to our clients however, it is incumbent on us to remain calm and reasoned when others are running around like headless chickens.

No one likes a jittery air steward. This is just as much the case whether we are talking about political, legislative or market-based turbulence.

Disappointing then that some advisers, who preach such stoicism when it comes to the short term movements of the stock market, have become increasingly hysterical on social media about what Reevesy might have planned for us all on Wednesday¹.

I get that it can be difficult for those of us in the advice business to set aside our political opinions when we do the day job. But if you didn’t realise that the vast majority of the financial services industry lean a certain way politically before all of this, you sure do now.

All the kerfuffle about the Budget has got me thinking this week about what actually matters.

Try as we all might to be as clever and tax efficient as we can, as an investor you only have one job really.

And that is to keep your shit together at the exact moment when everyone else is losing theirs.

Now is the time to remind ourselves of this fact. The global stock market (as defined by the MSCI All Country World Index) has been on a great run of late, and we are within spitting distance of all time highs.

Source: FE Analytics. Chart shows the return of the MSCI All Country World Index over the past twenty years, investing £10,000 on “day one”.

The time to make sure your roof is ship shape is when the sun is shining, not when it’s raining. And at the moment - it’s beaming.

But good times, just like bad times, pass. It is only a matter of time before “the next thing” arrives, and the time to prepare is now.

In my experience most people (including the pros) massively overestimate their ability to remain calm when markets, and investment portfolios, are falling in value.

While this will be a battle fought primarily on an emotional front, it can be useful to know in advance what to expect. Surprise is the mother of disaster for investors.

The below table shows every drawdown (fall) over 20%² from all-time highs for the S&P 500 (US stock market) since 1960 along with the time it took for the market to reclaim its previous high.

Source: Y Charts. Returns are shown in USD terms. I have shown returns for the S&P 500 as the data goes further back than for the MSCI Index. Also the US market is the biggest and most important in the world, so there’s that.

The above figures show the falls in value for a 100% equity market index, based in one country. If you are investing in bonds and cash alongside your equity exposure you could reasonably expect your downside during the next market event to be reduced accordingly³.

For example, if the equity market falls by 30% and your allocation is 80% in stocks and 20% in bonds you should be mentally prepared for a 24% fall. A portfolio allocated 60% to stocks and 40% to bonds, you could expect to fall by around 18% - and so on and so forth.

These are rules of thumb and the future will never look exactly like the past. But you need to know these numbers because you need to know what to expect the next time that the market goes through a period of difficulty.

Whatever drives the next market event will feel like an aberration. A new and novel threat.

It will be anything but.

Just look at that table again - periodic and significant but temporary turmoil is the natural course of things. Awful things have happened in the past, and they will surely happen again.

I really can’t reinforce this enough - keeping this fact front of mind is imperative.

You can be as tax efficient as you want with your money, front run as many Budgets as you like, but it will all be for naught if you abandon a perfectly sensible investment strategy at the worst possible time.

To do so will be to wander into the financial wilderness.

Have a great weekend.

None of the above is intended to constitute advice to any individual. Past performance offers no guarantee of future returns.

1. I’m writing this on Sunday night, and I’m sure as shooting not re-doing it on Thursday morning. Sorry.

2. A “bear market”.

3. If history is any guide of course, your long term returns will also be reduced accordingly.