Time to Exit?

I would not have ordinarily expected to be writing my third blog post 13 days into the New Year. However these are extraordinary times with significant stockmarket volatility and this morning I had two concerned clients e-mail me. One asked if she should be worried and the other noted “that investments were going mad again,” (I love that) and asked if she should cash out any investments. The first client sent me a link to an article in the Guardian based on warnings from RBS economists. It was entitled, “Sell everything ahead of stock market crash, say RBS economists.” You can read it here http://gu.com/p/4fm2y/sbl . It is brief and readable and at first sight the advice seems reasonable. I had read the warnings elsewhere so the article was not a surprise.

So what was my response to my clients’ concerns? Firstly I did not try to dismiss the claims in the article; RBS may be proved right but I wrote back with the following perspectives and counter comments. In summary I advised both clients to hold their investments for the long term. Some key points I made with some additional material thrown in for the benefit of my readers are:

  1. The 10% to 20% predicted falls in US and European markets seem modest in the context of historic stockmarket crashes. For example in 2008 the FTSE 100 index fell 31% (Source: Daily Telegraph). It is also worth noting that the FTSE 100 has already fallen about 16.5% from its late April 2015 peak of 7,104.
  1. Research from Fidelity highlights the importance of remaining invested during periods of turbulence to avoid missing the best days. In an article from March 2015 entitled, “How not to lose money in the equity markets,” Matthew Sutherland, a senior investment director for the Asia Pacific region at Fidelity wrote:

“… trying to “time the market” is also highly risky. The tendency will be to sell at the wrong time – when everyone else is selling and prices are already down. And having sold, the risk is that you will miss the bounce – the moment when markets start to rise again. Missing those market bounces can seriously reduce your total return. This is starkly shown in some analysis run by Fidelity. Over the last 20 years, if you had invested £1,000 in the FTSE All Share and left it there, it would have grown to £4,747.36. However, if you had missed just the 10 best days in the market over that period, it would only have grown to £2,568.92 – almost halving your total capital at the end point.”

The full article can be read here:

https://www.fidelity.co.uk/investor/markets-insights/investing-themes/details.page?whereParameter=investingthemes/not-to-lose-money

The principle here is that time in the market is more important than timing the market. The latter is of course notoriously difficult.

  1. Data from Fidelity’s US investor website showed that the five year returns following major stockmarket crashes have been excellent. Citing returns of the S&P 500 index data showed that the best five year return from US equities was 367% starting in May 1932 during the Great Depression. Similarly from March 2009 after the global financial crash the five year return was 178% (Sources: Ibbotson, Factset, FMRCo, Asset Allocation Research Team as of March 31, 2015). In one sense this is unsurprising, rallies are expected after crashes but perhaps we need to be reminded of this as a reason to stay invested. Good times normally follow the bad.

https://www.fidelity.com/viewpoints/investing-ideas/strategies-for-volatile-markets

  1. Historical experience with managing old and mature client portfolios (for the sake of clarity the old and maturity bit refers to the portfolio not necessarily the client!) has shown me that where clients have remain invested for years through thick and thin, the 1987 crash, the technology bubble bursting in the early noughties and the global financial crisis of 2008 portfolio profits have been excellent. If you are one of those client you will know what I am referring to.
  1. Selling equities now means you will either crystallise losses or low values. Moreover in my latest blog about China on 8/1/16, which has triggered the volatility I suggested the sell-off has been overdone, driven by sentiment not economic fundamentals.

To finish I must highlights some important caveats to my somewhat less pessimistic view than that emanating from RBS. Firstly stockmarkets can remain depressed for long periods. The classic example is Japan where the Nikkei 225 index is still below its 1990 peak. Secondly I do occasionally advocate tactical investment, trying to time investments or their withdrawals, as an overlay to a long term buy and hold investment strategy. To be fair I have had mixed success here which shows  timing the market is darn difficult. It worked last spring and early summer where I advised selected profit-taking and encashments to leverage the stockmarket highs at that time. Where it has not worked is calling the bottom of the commodities market far too early. I advised a number of clients in the last few years to buy resources funds in low values only to see prices fall further. A third caveat is that for personal reasons client may be forced to cash out investments or pensions rather than invest for the long term. In these circumstances  they may have no other choice than to crystallise losses. It is why I strongly advise clients to retain an emergency cash pot. It is an insurance designed to protect investments. Finally it should be noted that RBS advocated investment in high quality bonds as a safe haven – not quite the same thing as ditching everything.

In conclusion I am reasonably relaxed about what is happening and for most clients my advice is to sit tight on their investments.

The contents of this post is intended to be my own general investment commentary and not an invitation to invest in equities or specific markets as these may not be suitable for your financial circumstances or your risk profile. You should seek individual advice before making investment decisions including selling funds.