Why risk shouldn’t be reactive

After 10 years of a record bull run, the recent market correction has come as a shock – even to those who have seen significant equity movements in the past. As a result, some have hit the panic button, and looked to de-risk their portfolios.  That said, I’m pleased to say that none of our clients did so.

Over the years, I have come to realise that if you are shopping for something, and it’s half price, you don’t wait until it’s back at full price before you buy. You might even stock up.

Whether that’s groceries or socks, it’s natural behaviour.

But when we see a price fall in investments, our instinct is to do the opposite. While this is understandable there are many pitfalls of turning that instinct into action.

When is a loss not a loss?

Virtually within a week, the FTSE All Share shed nearly 1500 points – around 34%.  But, and this is important, this loss was not locked in unless investors immediately sold their investments and withdrew the resulting cash from the market.  In doing so, they would have missed the market rebound over 17% in the following 3 weeks, and crystallised a larger loss than if they had remained in the market.

Opportunity knocks

Imagine instead, that the investor was savvy enough to sell before they suffered the full pain of the market drop and exited the market round about the end of February. At that point, the FTSE All Share had fallen just 11.48%. By March 23rd, they might have been feeling quite pleased…but with the market now trending up, what will they do?  When do they decide to buy back in?

From what we read, it would appear that Active managers show they are broadly very excited about the opportunities now present. They are in no hurry, but there are businesses they have wanted to buy into for some time that now look to be priced attractively.  Investors out of the market stand to miss out on significant growth when these businesses bounce back.

Price is what you pay, value is what you get

In recent years, the debate of active versus passive fund management has been lively. A rising tide lifts all ships, so passive vehicles have held their own in a decade-long bull market.

If the tide has turned, now is the time for Active managers to prove their worth. They have the scope to be selective.  This means they can position themselves to avoid the worst hit areas if we see a recession, or conversely, maximise the benefit when we emerge.

Risk as part of a holistic financial plan

The most important thing to remember in all of this is that risk is an integral part of a clients’ financial plan.    Their Risk Rating is not an arbitrary number, subject to market conditions. It is arrived at through a personal assessment of their risk appetite, their need to take risk to achieve their stated objectives, and their capacity for loss – an objective view of how much loss the client can afford to bear.

This has all been factored in to get them to where they are today.  As part of that advice journey, it was agreed that the clients’ investments were suitable for them, over the period of time they have to invest – even encompassing shorter term market falls.

And the value of good advice is becoming clear. You will no doubt have been aware of the wartime rhetoric has been used to rally the nation during this unprecedented time.  The poster of Lord Kitchener is well recognised, but maybe not the name,   The caption is of course is emblazoned on mugs, tee shirts and all manner of merchandise.   

The sentiment too is recognisable – “Keep Calm and Carry On”.

With thanks to Parmenion Capital Partners

Today’s Markets

I just received an email from 7IM about today’s markets. 

They write; Clients need only to read the news to worry about their investments right now. It’s no leap at all to consider whether a move to cash is a good move. In the context of long term returns, there is a simple answer to that – it isn’t.

Looking back at the worst market conditions in recent memory, we’ve turned to an old favourite to illustrate this…

 A 7IM Balanced holding worth £100k on 19th May 2008, the day the FTSE began its descent that year, is now worth around £156k. However, with a year spent in cash from 1st March 2009, the market low, it would be worth only £126k today. That’s a whopping 56% vs 26% return. Those dates were the worst you could’ve picked but if you’d have been a bit luckier and timed your exit earlier to avoid more downside, i.e. cashing out on 1st October 2008 for one year, you’d experience a 43% return vs 56% had you stayed invested.

Almost every scenario we’ve run ends in a lower return when investments were substituted for cash around the financial crisis. Only if you’d timed it perfectly, into cash at the top and back in at the bottom, did it work. The brightest minds in our industry didn’t call that.

It’s time in the market, not timing the market that pays. 


That’s exactly what I’ve been saying for years!


Diversify, Diversify, Diversify

One of the main safety features of any investment, be it Pension Funds, ISAs or OEICS (Unit Trusts to us oldies) is the ability of the fund manager to diversify his or her portfolio.  Most Multi Asset Portfolios have this facility but that may not be the case with older style Funds where they were maybe, for example, all UK companies or all Japanese Companies or even With Profits in which case nobody knew.

A diversified portfolio should be able to invest in UK Equities,US Equities, European Equities, Asian ex Japan Equities, Japan Equities, Smaller Companies, Emerging Market Equities, Hedge Funds, Income Funds, UK Property, European Property, Fixed Interest (Gilts and Corporate Bonds), Convertibles, and the like etc.

Almost certainly however, in the case of Ethical Funds, the fund manager will probably give Gilts a miss, due to Government (the issuer of Gilts) raising money for defence projects.  Armaments is one of the things treated as non-ethical.

The mix of the above will also depend on how much risk the manager is aiming to take.  That’s why we carry out a risk profiling assessment to ensure your views are in line with the selected Portfolio.

If you think your funds are not well diversified, why not contact us and we can have a look and let you know a) is it’s diversified and b) if it matches your risk profile.  Our telephone number and our email address are well published on the website.

Fraud within the personal finance sector

Traditionally, it has been viewed that criminals target the vulnerable and elderly. However, Royal London personal finance specialist Helen Morrissey notes that this view is “evolving quickly”, with recent scams showing that no one is safe.

“There are even reports of fraudsters exploiting the recent issues at TSB to send out emails asking people to set up new accounts from which they then target people’s savings. Other recent email scams include people receiving emails from HMRC saying the recipient is due a tax refund and needs to click on a link and input their details,” Morrissey added.

Emails, such as the ones described by Morrissey, often include the logo’s and headings of the firm that it is impersonating, meaning that consumers must be vigilant, taking the utmost care when opening emails or answering phone calls from fraudsters claiming to be from a legitimate source.

Morrissey warns consumers to “always bear in mind” that a bank would never send you an email asking for your PIN number or on-line banking details.

“They certainly won’t ask you to transfer funds from one bank account to another. It is always worth checking the sender’s email address to see if it is genuinely from the company they say they are from. You can do this by hovering the cursor over the email address rather than clicking it,” she said.

Referring back to Morrissey’s previous point in relation to people of all ages being targeted by fraudsters, not-for-profit organisation Cifas revealed that, in 2017, there was a 27 per cent increase in the number of 14-24 year olds being used a ‘money mules’. In particular, Cifas reported that “cash-strapped” students were being targeted by fraudsters, often promised large financial rewards for minimal amounts of work.

The National Fraud Database warns that criminals were targeting these younger people through social media platforms and messaging applications, such as Whatsapp.

“To avoid banks’ stringent identity fraud checks, criminals are increasingly turning to laundering their illicit funds through other people’s bank accounts, and probably giving them great compensation for doing so.

This trend has already increased 11% since 2016 and could easily continue to rise. More young people are being recruited in this manner, particularly among the student population, who are handing over their identities and banking credentials without understanding the implications.

Don’t put all your eggs in one basket

By and large, most investors are more concerned about losing money rather than making money.  They don’t want to see the value of their investments fall.  Its a common trait in most people.

And therein lies the dilemma for Advisers.  How to protect the Client’s savings while at the same time get a good return?

The answer is Diversification of assets.  Diversify the investments over many funds, many sectors, and many asset classes.

Studies have shown that a diversified portfolio doesn’t always sit at the top of returns but there again it is also very seldom at the bottom of the heap.

A diversified portfolio designed to meet each investors specific needs in line with their risk profile will help clients avoid the downside risk of a “non-diversified” portfolio.

INVESTMENTS! – Active versus Passive or Active and Passive.

Some Advisers have debated long and hard whether Active or Passive Investing is better in the long term.

In more recent years, the passive advocates’ voices have been heard loud and clear but this of course misses the point that there remains a number of hugely talented fund managers who have managed to beat the market, some by a significant margin, over time. The key, of course, is being able to find them.

I am fairly agnostic in this debate and believe that it is important to give clients the choice of both active and passive solutions while at the same time sticking to my mantra of Diversify, Diversify, Diversify, and matching whatever portfolio is best for the Client in terms of his or her Risk Profile at a reasonable cost.

I try to give my clients a balanced view on both sides of the argument and allow them to make an informed decision on choosing one strategy against the other.

There is of course a third way and that is blending the two strategies to give a good mix and using the investment house’s expertise in choose which funds should be actively managed and which should be passively managed. That choice is not set in tablets of stone and the blend is open to movement between both strategies depending on circumstances.

Of course like all investments, past performance is not indicative of future performance and the value of investments may go down as well as up. Also, the income generated by investments is not guaranteed and may fluctuate. Lastly you should be aware that you may receive back less than the amount that you invested.

If you would like more information, on this subject ( or any other, for that matter ), please feel free to contact us. A no obligation meeting is available should you wish. And I’ll buy the coffee!