Terminal 4, Heathrow airport, outward bound for Cape Town for a well earned rest and some southern hemisphere sun. At the gate, I’m an early arrival, courtesy of my girlfriend’s organization and a desire for a stress-free start, so I have time to watch the tv news channel. The female newscaster is telling me that “markets are in turmoil”. The FTSE100 index fell by 190 points yesterday (15 January) to 6025. That’s about 3% down. She hands over to a very excitable male colleague, who waves his hands in the air and goes on to explain that “Markets have fallen by 7% since the beginning of the year. The banking sector has been “decimated” by the credit crisis, oil prices are at an all time high, inflation is under pressure and even the ever reliable (they only go up don’t they?) house prices are falling.” The media would have us believe that the world is about to end… again!Have we not been here before? Well, yes, several times in fact. I remember the 1987 stockmarket crash, 20 years ago, the collapse of Barings Bank (Nick Leeson) in 1996, the collapse of Long Term Capital Management in 1998, the bursting of the dot.com bubble in 2000.
I also remember the property crash of 1988. Rather amusingly, I joined an Estate Agency practice as a mortgage adviser on 31 July 1988, which was the day that multiple tax relief on mortgages (remember that?) was abolished. Prior to that day, people were queuing to buy houses, and all of a sudden these buyers disappeared overnight. The market crashed on the back of rising interest rates and the loss of the artificial stimulus (tax relief) and fell by about 25% over three years. I know this because the house I bought in 1989 for £64,000 was worth £49,000 at the bottom of the cycle. That house is now worth around £200,000, and had I still been living in it, the period of temporary “loss” would be a distant memory.
These two tales have much in common. In both cases, if you read the press, the world was coming to an end, and in both cases if you had simply ignored it, you would not have lost any money. As we financial planners bang on about continually, investment in risk-based assets should be for the long term, and you should expect short term volatility to occur from time to time. If your cake mix is supposed to be in the oven for 30 minutes, don’t open the door after 5 minutes and expect it to be cooked. And if you do open the door after 5 minutes, don’t be surprised if the cake sinks!
It is human nature to want to avoid losses, and yet we have come to expect better than average returns. By definition, we cannot all have better than average returns! We all seek that rare investment which gives us all the gains and none of the risk. It doesn’t exist. In seeking to avoid losses some people (like a recent client) sell their investments when they see the market fall and move into cash, and in doing so, crystallize a loss. They then justify this by saying that they will wait for the market to improve before reinvesting again. In this process, they adopt a “sell low, buy high” strategy - a sure fire way to make losses. Often, some investors get the timing right and congratulate themselves on their foresight. However, this is no more than a lucky outcome and is not likely to be a repeatable process. Even very clever economists and investment managers with all their information and resources, get it wrong, so what chance do we have?
The lessons we can learn from history are that prices will even themselves out over time and they will find the right level. In other words markets are valued efficiently. We can also learn that the current media doom and gloom will look differently 5, 10 or 20 years from now. I don’t believe in trying to time markets, and I don’t believe in chasing a specific asset over short periods with a view to selling and moving into other assets. This is because I believe there is as much chance of getting it wrong as getting it right.
I believe you should only invest in assets like property and equities for the long term (5 years at least, probably 10 or more). I believe you should invest in a multi-asset, multi-manager portfolio which has a balance relevant to your long-term return objectives, and your capacity and tolerance to short term volatility. Once you have implemented such a strategy, I think you should ignore all the media noise and fuss about whether markets are booming or crashing. You cannot control what the market will do, so what use is the information anyway?
One thing I would put money on, is that future markets will continue to be volatile and the media will call the end of the world. And most private investors will lose money because, in fear of losses, they adopt the wrong strategies.
The legendary Warren Buffett said “The markets are efficient at taking money from the impatient and giving it to the patient.”