For most investors the time frame for investment quite rightly varies according to their goals, and this means that most investors have various time frames in mind to meet their different goals and it can be difficult to pin down a client to a specific risk profile for all of their investment needs. Investors are exposed to many tempting offers for their portfolios as they move towards these goals and it is relatively easy to understand why they would seek to improve returns by moving these investments around, particularly if it is a long term goal.
If we look at the imminent decision on Britain’s possible exit from Europe, an investor might be tempted to sell investments ahead of any uncertainty and then invest after the decision is known. This may well prove to be a prudent decision but something like a possible Brexit is a short term event of which there are many (some known and some unknown) in a long term investment cycle. The chances of getting a decision right on every occasion is therefore remote. The degree to which the event will affect markets on each occasion is also unknown: for example in a vote like this many of the variables are well debated and perhaps in the price of assets already, in which case we may not see much volatility, however many events are unknown and can create far higher volatility.
For most investors the ability to spend the required level of time in research to make the majority of their decisions effective is limited and this is the base case for what is known as a buy and hold philosophy – a process that Warren Buffet, one of the most famous and successful investors of all time, has used effectively over decades. Mr Buffet has access to far more information than the average adviser or investor so should this premise hold good for us as investors as well?
The answer remains firmly yes in our view as one famous economist pointed out, the longer term is simply made up of a series of shorter terms, and gambling on the direction of markets in each of those shorter periods is not a skill many investors have at their disposal. Smaller investors have never really had the ability to influence the movements of stock markets nor have they been able to develop a system of effectively timing markets.
There will always be investors like George Soros who can claim to have had great insights into the path of capital markets but these calls are very much like any other bets on the market some of which are right and some of which are wrong. As noted arguably the world’s best known investor, Warren Buffet, has amassed most of his fortune on a buy and hold philosophy. Clearly his skill is not as simple as that one strategy, but the principle remains that very few investors get timing decisions right enough of the time to continually make profit. History is littered with investment breakthrough that have resulted in systems that can ‘beat the markets’ but nearly all have failed over the longer term. Relatively recently the failure of Long Term Capital Management (LTCM) stacked with mathematical geniuses and Nobel Laureates nearly brought the financial markets into meltdown after a series of market errors following the 1998 Asian crisis. LTCM was a hedge fund and whilst many investment professionals aspire to running this type of investment vehicle they are often no more successful than simpler less costly vehicles open to retail investors.
Returning to Brexit as a current theme in markets we can see that it would be tempting to act prior to such an event individually. We should be careful however, as most advisers will have entrusted their client monies to investment managers who have far greater access to information than we have as individuals. Within their portfolios they can react to changes in market information far quicker than we can. With a possible Brexit looming, managers are holding higher levels of cash with larger numbers of defensive larger cap funds to dampen volatility whilst still remaining exposed to the market should the remain vote win and markets rally. As an individual it would be difficult to do this on a consistent basis.
If we then overlay the fact that most sensible advisers involved in financial planning look to build portfolios, which include risk assets, over the longer term, trying to add incremental return by constantly switching such plans makes little sense. There will always be the need to provide for shorter term goals but these are generally protected by reducing a client’s exposure to risk assets holding cash or bonds. These financial plans are usually under regular review so no one is advocating that a 20-30 year plan should be held in place as if locked in a time warp. Economic conditions do change as do goals but consistent chopping and changing has proven to be a far greater gamble than maintaining a portfolio which has been built on a strategic long term views.