Recent e-mail correspondence with a client about the risk of investment has got me thinking. It followed a similar pattern with other clients. They were all quite pessimistic about the prospect for stock markets and their investments whereas I am more bullish in comparison. Having delivered a current valuation statement to this particular client and a brief commentary he wrote:
“I just wish I could be as hopeful as you regarding global economy improvements as I don’t see much reason for hope when I look at the news!”
In response I wrote:
“I would not say I am overly optimistic about the global economy and the prospects for global stock markets but I am less pessimistic than other commentators and yourself. I expect that some of the uncertainty currently plaguing us will be resolved in whole or more likely in part in 2020 notably Brexit and the US/China trade wars. Moreover central bank monetary policy is highly supportive, which means interest rates will be lower for longer. This depresses bond yields making the dividend yield on equities much more attractive to investors. US markets recently hit new highs a few weeks ago, although UK equities remain unloved and undervalued. I think most of the risk is priced into the market here and there will be a re-rating of share prices in time.”
Despite my brief market analysis which no doubt can be challenged on various fronts, it got me thinking. Why am I less pessimistic than my clients? Am I downplaying the risks? Am I blind follower of the cult of equity investment? Am I biased needing to talk things up and see investment in a more positive light, in order to justify my advice or dare I say it justify my legitimacy? All of those could be true. To try and make sense of this we have to consider what is making my clients so glum. Well as my client said just look at the news! There is a whole bevy of negative issues at play here – Brexit, Trump, the US/China trade war, weak economic European growth, geo-political risk, the demise of Neil Woodford, once hailed as the best UK fund manager and fears of contagion from the Woodford debacle spilling over to other star fund managers. These are real issues, not to be down played. So the last thing I want to do is be dismissive of my clients’ concerns. It is their money after all that I look after. So if they are feeling cautious and want defensive investment I need to respect that.
But back to the key question. The reason why I think I generally have a more optimistic attitude than my clients is that I tend to view equity investment in a historical context. I became an IFA in 1992 and have managed portfolios through turbulent times, the Asian currency crises of 1997 and 1998 the technology crash in the early noughties, the global financial crisis in 2008 and 2009, the Euro fallout in 2011 with lots of mini wobbles in between. Through such times I have seen portfolio values fall sharply and recover and over the long term move nicely into profit. One of the best things about reviewing portfolios that are 8,10 or 15 years old is that they are generally very profitable. As an example I remember reviewing a client’s portfolio a few years ago. She had invested £3,000 into a high quality European equity fund in 1995, before she became a client. I have recommended it to others. It had paid out dividends but was worth about £21,000 about 20 years later. Despite the sell-offs in 2001, 2008 and 2011 the fund had risen seven fold. The point is in the long term I have seen equity investment come good and so I tend not to place too much store about the current headwinds. It is of course potentially dangerous to assume this will always prove true and account must made for clients who invest for shorter periods of time.
In conclusion those who see the glass as being half empty are looking at things in a different way to me. It is a shorter term view with a focus on the present. My perspective is long term and historical. My clients’ views are not wrong, just different.
The content of this blog is based on my own understanding of investor psychology and is intended as general information only. Nothing in this article should be construed as personal investment advice. You should seek individual advice based on your own financial circumstances before making investment decisions.