WHAT SHOULD INVESTORS DO?

Market Update




MARKET UPDATE - MARCH 2020

John Butters - Chief Investment Officer
19th March 2020

 

  • Markets have suffered a sharp fall but there should not be a sense of panic for investors
  • Our analysis of historical fluctuations shows this decline is unusual, but not outside expectations
  • As our clients are long-term investors, our advice is not to react
  • We have stress-tested all our clients’ financial plans for scenarios worse than this
  • Please do get in touch if you have any concerns and would like to discuss your portfolio or investments

What is happening in markets?

Since our last communication stock markets have fallen further. Global markets are now down 19% for the year to date (to 18 March, based on the iShares MSCI World ETF) and returns are now around zero since the start of 2019. Most of our clients of course have a mixture of equities, bonds and other assets and are therefore seeing declines much less than this for the year to date.

The performance of the stock market compares to a largest historical decline of 48% in our testing back to 1999. The most recent falls are well within the range of things we already knew could happen. In our testing to assess our clients’ capacity for loss, we stress all portfolios as if a 48% stock-market declined happened immediately.  A re-analysis now is unlikely to suggest a change of investment strategy – a portfolio that made sense initially should still make sense.

Of course this may no longer be the case if your personal circumstances have changed: if so, please get in touch with your Weatherbys Private Banker and they will be happy to advise you as to what to do. As ever I am also available as and when you need me.

What should investors do?

There have been crises before, and there will be crises again. We know that they happen, and we have tested portfolios to see how they would have behaved in the two very bad ones of the past 20 years. This is an unusual practice – many managers shy away from talking about risks as clearly as we do – but we do it because we know that crises happen and it is vital that investors respond in the right way when they do. The right way is unequivocally to hold on. We know that on average investors lose between 1% and 4% per year by trying to make market timing decisions. The whole purpose of our unusually careful risk profiling and cash-flow modelling is to check in advance that you will be able to hold on to your portfolio in times like this.
 
Holding on to investments is what I am doing myself. My investments are in tracker funds with between 80% and 100% stock market exposure. I have not looked at them and I do not mind how much money I have “lost” because it is not lost unless I was going to sell. The market is in a pessimistic mood and is offering to buy the portions of the major, global companies I own at lower prices than two months ago, when it was feeling optimistic. I am not interested in its offer. I own those companies for the long term and I am diversified enough that I can afford for some of them to fail. The market can offer what it likes for them; I have no doubt it will offer more in due course, and I still will not sell. As the famous investor Benjamin Graham said, in the short term the market is a voting machine – and people’s votes are currently negative – but in the long term it is a weighing machine that reflects the long-term value of companies. I urge you to regard the short-term, panicked voting of market participants with polite disregard.
 
For our investment clients, what you certainly can and should do if you are at all concerned is ask us to re-run your cash flow plan (or run one for the first time if we have not done so before). These plans include an assessment of the probability of meeting your long-term financial goals. If you fear that your long-term goals may have been put at risk by the recent market falls, we are at your disposal to run an analysis for you.

What is Weatherbys doing?

We do not believe in market timing but rather in engineering. To switch analogies, we have set out to build a rugged investment advice machine and we are watching its performance carefully. We will not react in haste, but may re-engineer any parts that do not perform exactly as expected, once the crisis has passed.
 
The most important thing we are watching is portfolios’ declines from their previous peak. This is a key risk metric for us and for you. We use history as a guide and unless stock markets fall by more than they have historically, and a lot more than they have so far (see above), we expect the numbers to be in the right ball park. If any portfolios fare worse than our worst expectation – which has not yet happened – we will adjust the risk profiling process to take account of new experience.

With regard to investment managers, we are monitoring them and have not seen any notably poor performance in the context of market behaviour. We are keeping in touch with investment managers as events unfold but also avoiding becoming a distraction. You and we have chosen our generals and this is a time to let them practice their profession. In due course there will be time for a calm assessment of how well they have done.
 
We are also watching currency and bond markets closely to see whether they react as we expect. So far the indications are broadly good: foreign currencies have risen, offsetting market declines, and government bonds have increased in value while corporate bonds have fallen, as we would expect in a stress period. Government bonds have fallen back in the past few days but it is too early to say what this may mean: it could be temporary, or the start of a recovery as government and central bank action kicks in.
 
Lastly, for our clients, we are keeping on top of events as you would expect in order to inform you about the bigger picture. We sent a high-level commentary and other materials to clients last week and your banker is here to talk through your concerns about your portfolio or the economy more broadly.

Some concluding thoughts

Some individual businesses may not recover from the current crisis. But people’s investments with us are not in an individual small or medium-sized company. Our clients own a diversified portfolio of shares in a number of the largest companies around the world, and bonds issued by those companies and sovereign governments. In other words, they have diversified exposure to the global economy. The global economy is not going to be brought to an end by this virus, any more than it was ended by the oil shocks of the 1970s, the three-day week, blackouts, the miners’ strike, the Cold War, Black Wednesday, the crash of 1987, the dotcom crash, the global financial crisis or the many other crises of the past few decades. We therefore have every expectation that portfolios will recover once the crisis has passed.

We are here to discuss these issues

We are here to help. There are no silly fears and no unreasonable questions at a time like this, with scare stories all over the media. If our investment clients have any concern at all then they should feel free to call their private banker for a discussion or to contact me directly.

CONTACT US

Important information

The information contained in this article does not constitute financial advice or a personal recommendation.  Past performance is not a guide to future performance. The value of an investment and its income can both increase and decrease and you may not get back the full amount originally invested. The value of overseas investments will be influenced by the rate of exchange.

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