Trump-lite or triple strength Republicans? Expect pro-business, tax cuts and slashed spending.
Is it time to “Sell everything except high quality bonds”? Economists at the Royal Bank Of Scotland, the state owned bank, released a sensational research report last Tuesday which has gone viral, telling clients to sell all their assets and buy high quality bonds 1. We received questions all week from clients, friends and families from across the world asking what to do in light of this report and the difficult start to the year for equities, commodities and all risk assets.
Our opinion of the RBS research report is simple… It is not grounded on any verifiable research or data that is known to accurately predict future stock market performance and as such should be summarily disregarded. It is simply a sensational research report that may prove to be right, but it is highly unlikely that it will. It is possible that equities may fall substantially this year and we should expect a market correction every once in a while. In fact historical data established that a market correction of 20% or more occurs on average every 3.5 years in the US and the recent 5% loss there happens on average every 71 trading days or so 2. So what we are experiencing now is normal stock market activity and would be anticipated by experienced investors. The stock market does not always appreciate, but it often does (historically more than 70% of the time).
S&P500 Performance Annually 3
Also the US stock market has been five time more likely to be up 20% or more any given year the down 20% or more 4 .
In true market fashion, risk perception has dramatically swung from optimism in May 2015 to current pessimism as investors are starting to fear a ‘cataclysmic’year and consequently, have been selling equities over the past two weeks5. Readers of our blogs and long time clients will be familiar with “our friend” the manic-depressive Mr. Market6 who’s mood wildly swings back and forth from optimism to pessimism and who offers the “astute”… investor investment opportunities to buy low and sell high. Benjamin Graham (the creator of Mr. Market) told us to ignore Mr. Market and to focus on the intrinsic value of stocks. He believed that investors should buy stocks when they are depressed or inexpensive which he called ‘value’ stocks. Eugene Fama the 2013 Nobel Laureate in Economics and Kenneth French showed in their research that both value and small company stocks tend to outperform the stock market 7 and Fama showed that astute investors should not try and guess the direction of markets in the short term 8.
Investor behaviour is crucial when it comes to successful investing. Dalbar produces an annual report called the Quantitative Analysis of Investor Behaviour. This has been one of the industry’s best and longest running reports on how poor individual investors perform because of simple investing mistakes that they continuously repeat. There are 9 distinct investor behaviours that they report lead to this underperformance – one of which is ‘Media Response 9’. The 2015 Dalbar study showed the average US equity mutual fund investors underperformed the S&P500 by 8.19% in 2014 (5.50% vs the index at 13.69%) and the average fixed income mutual fund investor underperformed the Barclays Aggregate Bond Index by 4.81% in 2014 (1.16% vs the index at 5.97%). Over the past 20 years the gap was 4.66% per annum for US equity mutual fund investors. So on that basis, for $100,000 invested in the S&P500 the investment would be worth c$654,638 as opposed to $275,099 10 (that’s almost 2.5 times as much).
Another (older) study published by Terrence Odean in the Journal of Finance supports the Dalbar results and is titled ‘Trading is Hazardous to Your Wealth’11. Ironically he quotes Benjamin Graham on the very first page who squarely points the blame at the investor himself – ‘The investor’s chief problem—and even his worst enemy—is likely to be himself’.
So our strategy is simple:
- Diversify – Diversify investments in stocks, bonds and other investment. Some investments will have good years while others are having bad years.
- Rebalance periodically – Sell some stocks when they become too high a percentage of a portfolio and buy stocks when they become too low a percentage of a portfolio.
- Control behavior – Don’t panic when the market falls as this is normal market behavior.
- Don’t trade too often and stick to a buy and hold strategy.
- Don’t pay attention to the media or financial ‘experts’ predictions as they get it wrong more often then they get it right. Remember a broken clock is right twice a day.
The start of the year has been unsettling to many investors but behavior during times of market stress is crucial. We hope you found this article helpful and that it puts the recent market activity into perspective.
The above Blog does not take into account the specific goals or requirements of individuals and is not to be construed as advice. You should carefully consider the suitability of any strategies along with your financial situation prior to making any decisions on an appropriate strategy.
Past performance is not an indicator of future results.
Currency fluctuations may increase or decrease the returns of any investment.
You should remember that the value of an investment and the income from it could go down as well as up. The return at the end of the investment period is not guaranteed and you may get back less than you originally invested.
 Standard & Poors
 50 out of 191 times the US stock market has risen more than 20% in a calendar year. In only 9 out of 191 years it has fallen by 20% or more.
 Trimtab ETF flows http://trimtabs.com/data/fund-flows.html
 Mr. Market is an allegory created by legendary investor Benjamin Graham and often sited by Warren Buffet https://en.wikipedia.org/wiki/Mr._Market
 The Fama French three-factor model https://en.wikipedia.org/wiki/Fama%E2%80%93French_three-factor_model
 Efficient Market Hypothesis https://en.wikipedia.org/wiki/Efficient-market_hypothesis
 ‘Tendency to react to news without reasonable examination.’
 $100,000 compounded at 9.85% annually over twenty vs vs $100,000 compounded at 5.19% annually over twenty years. http://www.qaib.com/public/downloadfile.aspx?filePath=freelook&fileName=fulleditionfreelook.pdf
The retirement journey varies from person to person and depends on your personal priorities and objectives. There simply cannot be a one size fits all approach toward retirement savings and subsequent drawdown options. The changes introduced in April 2015 give individuals aged 55 or over the freedom to access pension funds flexibly in a manner that is most appropriate for individual circumstances. Funds can be distributed in as large or small increments as desired and there is also generally no longer a requirement to begin distributions by age 75. This flexibility raises the importance of personal responsibility in making sure that you plan your drawdown strategy properly to meet your retirement needs and overall financial objectives and do not encounter a situation where you are unable to provide for your ongoing retirement needs.
Due consideration will need to be given to your asset base, your current and future income needs, any outstanding liabilities and any related tax implications. Gaining a good understanding of the options that are available to you and the important factors for consideration will help you make the right choice. You should be sure to take the requisite time needed to make a decision that best satisfies your needs.
Generally, under the new rules, your options include:
(1) Flexi-access Drawdown
(3) Phased Retirement
(4) Full Lump Sum Withdrawal
An overview of each option is provided in the following documents:
On Saturday 12 September, Burleigh House reception (the building that houses the MASECO offices) was opened in order to accommodate the Fireman March taking place locally. Refreshments were provided to participants and donations were being received in order to raise money for firefighters and their families, in particular those that have been badly injured or have died whilst on duty.
As of some of you may know, a fire broke out recently just two doors down from Burleigh House on 6 September. Thankfully no one was injured and damage was limited due to the prompt attendance of the London Fire Brigade.
In light of this and the worthiness of the cause, MASECO has itself donated to help those firefighters and their families that have suffered and show gratitude for the invaluable and immeasurable service the firefighters provide
Last week, myself and a few others attended the Franklin Templeton Investment Conference and had a chance to hear from Michael Hasenstab, Ph. D., about his global macro view of the world. You may or may not know that Michael manages both the Templeton Global Bond Fund and the Templeton Global Total Return Fund. He currently manages more than $175 billion in bonds1 and is the Chief Investment Officer of Templeton Global Macro Group. His flagship fund (Templeton Global Bond fund) is in the top 1% of its category and has more than doubled the benchmark2, outperforming it by 4.9% annually over the past 10 years3.
Active Approach in Global Fixed Income
Michael began by saying that there are broad macroeconomic themes that have set the scene for an inflection point in bonds and that he believes passive investing in bond indices may no longer be such a good strategy. The government bonds that dominate global bond indices typically pay very little interest, often have deteriorating credit quality and are susceptible to higher interest rates in the future.
As we have discussed on many occasions, we overweight portfolios to small cap stocks so investors can take advantage of the Small Cap Effect made famous by Fama and French in their pioneering research paper1. As long term investors, we also know that the Small Cap Effect does not present itself every year and unfortunately in 2014 it did not after a very good year in 2013 for small companies. When investing in small companies, however, all companies are not equal and we have known for many years that Small Cap Growth stocks tend to be some of the worst performers in the stock market. This is because of the Lottery Effect that many investors hope will result in them buying the next Apple or Facebook while it is still a small company and before others jump in. I recently read an interesting article that discusses these point in greater detail and thought you may be interested in it as well.
Click here to read this article: ‘Small can be beautiful but avoid urge to punt on riskiest stocks’.
1. Fama, Eugene F.; French, Kenneth R. (1992) “The cross-section of expected stock returns” Journal of Finance.
On Thursday 6th November, MASECO held its second annual Clay Pigeon Shoot at Bisley Shooting Ground in Surrey. The advisors and the guests had an amazing day shooting followed by a lunch.
The team at MASECO were very impressed by a special delivery in the office this week from one of the guests, who had some photos of our MASECO advisors put onto some marshmallows! A great gift!
Unless you have been travelling the Silk Road or sailing across the Atlantic, you will no doubt have been following the referendum debate and narrowing polls in Scotland with interest. Wherever your sympathies lie, it would not be unreasonable to have some concern about what this means for an investment portfolio if you are lucky enough to have one (or more).