Rolling with the times

Written by George Fisk, CFP™

The value of your investment can go down as well as up – it’s a statement required by regulation on almost every financial promotion, and it couldn’t be more accurate. This is because an investor accepts a higher level of risk to access returns above those of cash. In our opinion, whilst market volatility in isolation isn’t dangerous, making the wrong decision at the trough of a market downturn can be.

The S&P 500 has returned just short of 97% to Q3 2021 end from its March 2020 nadir of 33.72%. Over the last month, however, market volatility seems to be making a comeback with surging oil and natural gas prices, combined with anxieties over US stimulus tapering, causing markets to wobble contributing to a S&P 500 September 2021 return of -4%.

As a reminder, the US central bank had said it would purchase $120bn of Treasuries and agency mortgage-back securities each month until it saw ‘substantial’ progress on inflation and employment goals. Increasing consumer prices have ensured inflationary goals have been met and it now seems the employment goals are about to be too – the Fed has announced that the US jobs threshold has been “all but met”, paving the way for ‘tapering’ (a reduction in economic support) and leading to suggestions that the US central bank could announce a stimulus reduction as early as November.

In March 2020, one of our medium risk portfolios was seeing paper losses of 16.7%. Global equity markets as measured by the MSCI All Country World Index were down 33.52%. During this time Wealth Managers showed their value, fielding calls from concerned clients. The message was simple – hang in there, trust the process. The same portfolio that was -16.7% in March saw an annual 2020 return of +7.3% net of fees.

While volatility seems to be returning, the message remains true, with the last few weeks seeing more investment volatility than the rest of 2021. Nobody likes to see the value of their portfolio drop, but we need to remain rational and trust the process.

At the beginning of our consultative process, we work hard to ascertain four important metrics that guide us towards an allocation suitable for your needs.

• Capacity for loss
• Time horizon
• Goals and objectives
• Emotional Risk tolerance 

Some of these metrics will vary from account to account. We may look to take a higher amount of risk in a client’s retirement accounts as the longer time horizon allows one to ride any waves of volatility before drawdown or you might have a more aspirational goal for a certain pot of funds, thus dictating the need to take more risk. More risk for one client could look very different to more risk for another as the risk budget will always be referenced to your personal emotional risk tolerance.

The MASECO consultative process is designed to ensure that you are comfortable with the expected volatility that inevitably comes with investing in the capital markets. Our portfolios are diversified by asset class and geography as, in the wise words of Nobel Prize laureate Harry Markowitz, “Diversification is the only free lunch” in investing.

On the contrary, investor behaviour is one of the most significant risks to investor returns. DALBAR researched the S&P 500 annualised returns vs the average equity fund investor’s returns and noted the S&P 500 outperformed the average investor by 1.8% annually between January 1st 1999 and December 31st 2019. Even more notably, the Barclays Capital Aggregate bond index returned a premium of 4.5% annually versus the average fixed income investor.

At MASECO we manage portfolios objectively rather than subjectively. The emotional costs associated with human behaviour may lead to wealth destruction, as shown by the below graphic;

When one tries to manage their own hard-earned funds there is always a possibility that emotional biases may come into play. Adopting a systematic approach based on what we know helps eliminate these costly behavioural biases. If you have any questions about your risk budget, please speak with your MASECO Wealth Manager.

Important information

This document is intended for the recipient only.  It may not be copied, forwarded or otherwise distributed, in whole or in part, to any other party. 

Use of information:

• Nothing in this document constitutes investment, tax or any other type of advice and should not be construed as such.
• The investments and strategy noted in this document may not be suitable for all investors and making available the information in this document is not a representation by MASECO that any investment strategy is suitable for any particular client.
• This document is provided for information purposes only; is not intended to be relied upon as a forecast, research or investment advice; and does not constitute a recommendation, offer or solicitation to buy or sell any products or to adopt an investment strategy. 
• The views expressed herein do not necessarily reflect the views of MASECO as a whole or any part thereof.

Risk Warnings:

• All investments involve risk and may lose value.  The value of your investment can go down depending upon market conditions and you may not get back the original amount invested.
• Your capital is always at risk.
• Although the information is based on data which MASECO considers reliable, MASECO gives no assurance or guarantee that the information is accurate, current or complete and it should not be relied upon as such.

Performance:

• Past performance is not a reliable indicator of future results. 

MASECO LLP (trading as MASECO Private Wealth and MASECO Institutional) is established as a limited liability partnership in England and Wales (Companies House No. OC337650) and has its registered office at Burleigh House, 357 Strand, London WC2R 0HS. The partners are Mr J E Matthews and Mr J R D Sellon; Mr D R B Dorman, Mr H Q A Findlater, Mr T Flonaes, Mr N B Tissot, Ms A L Solana. Telephone calls may be recorded for your protection.

MASECO LLP is authorised and regulated by the Financial Conduct Authority for the conduct of investment business in the UK and is an Securities and Exchange Commission Registered Investment Advisor in the US.