As we stand braced for further disruption from COVID-19, there are understandably growing concerns regarding the impact that this pandemic will have on both our economic position and individual prosperity; with that in mind we would like to offer further context for investment clients to consider when assessing your individual position.

Markets Move in Cycles

It is important that we recognise that markets have always moved in cycles; history has proven they will ultimately recover. A question we (and financial advisers/investment managers across the country and around the world) have been asked in times of severe disruption, is why not reduce risk/move the portfolio to cash immediately and then reinvest when the market begins to recover. There are two fundamental issues with this –

Encashment turns a paper loss to an actual loss.
Accurately timing the ‘bottom’ of a market correction is impossible; recoveries can be just as quick as the falls. A delay of even a day or two can result in missing significant and much-needed growth. Markets have gained significantly in a day in recent times; growth that has been missed by those investors in cash.

The Financial Crisis of 2007-08

To highlight this, I have included some graphs below which illustrate how varying risk-adjusted portfolios performed during the financial crisis. These are illustrated using the Asset Risk Consultant (ARC) ‘Private Client Indices’. ARC is an independent company that provides the average performance net of fees for all clients from over 80 of the leading investment companies in the UK, and hence provides a fair reflection of what happened during this period.

The period shows how the 4 differing risk profiles performed from the start of the drawdown (i.e. the worst entry point), over 4 different periods. If we take the most extreme example on the graph (the higher risk portfolio), you can see that the portfolio fell by over 30% within an 18-month period. The 5-year graph however shows a positive total net return, demonstrating a steep recovery and highlighting how being out of the market for even just a few days in this recovery would have severely hampered long-term performance.

At the 5-year stage, although all the portfolios are in positive territory, the lower-risk portfolio (that fell the least) has performed the best over the period. At the 7-year stage it becomes clear that, even though the higher-risk portfolios suffered substantial falls, they are now the better performing portfolios. When extended to 10 years, this difference is accentuated even further.

Our Thoughts

Our foundations as a company are built on really getting to know our clients and understanding their objectives/circumstances well. We understand and appreciate how hard it can be in times like these to watch investment values decrease (just like Q4 2018 and June 2016 before that). We are confident (based on extensive ongoing research) that, over the longer-term, the strategies we have put in place for investors will meet their ongoing goals. 2019 was a fantastic calendar year for investors and, based on all of the research/insight we have gathered on COVID-19 and its socio-economic impacts, have no reason to believe that these longer-term patient investors won’t see great returns again in future.

Please don’t hesitate to get in touch with your adviser to discuss this in more detail should you need. As per government advice, we are mostly working from home at present, but remain available for our clients during normal working hours. If you cannot reach your own consultant, please call the office on 02476 388 911 and we will make arrangements for your consultant, or another consultant if circumstances dictate, to call you back.

Martin Lindsey - Managing Director

**Past performance cannot be relied upon as a clear indicator of future results.**

Short-Term Noise vs Patient Investing

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