Market volatility

We are undeniably in full swing after the Italian summer. Almost everything seems to be operating on a normal basis again, although ‘normal’ is always subjective depending on where you live in Italy. Roma doesn’t really qualify for normal, even on it’s best days!

Just how much people are getting back to normal again after Covid has amazed me. The memory of lockdown and ‘esercito’ trucks rolling out of Bergamo seems to have disappeared into the small corners of our minds. It might just be a self-protective mechanism, or maybe, like me, you are just happy to be able to go about your life in a relatively normal way again.

Normal for me is also talking to and seeing clients in person regularly, of which the latter has been somewhat missing for the last 18 months. I was reminded of this on a telephone conversation with a client the other day who said, ‘I haven’t seen you for a while Gareth’. It was said in such an innocent way, almost forgetting the last 18 months of various travel restrictions. A completely inoffensive remark and it made me realise that I haven’t seen many of my clients for quite some time now and that I really must get back on the road again. So that is my plan over the winter and coming months. I feel starved of client contact, something which I really cherish, and so I will be getting out there very soon.

Anyway, I don’t want to go on too much about my work plans as I have something much more interesting to write about…financial markets. Well, interesting for me at least!

As I am sure you are acutely aware there are millions of in-depth, factual and accurate analyses of the current global economy and the response of financial markets to Covid. I don’t wish to get into that (If you would like a recent world market roundup then just email me and I can send one through easily enough). What I do want to talk a little about is how we respond to financial market volatility (i.e. the rising and falling valuation of your portfolio) as the Covid recovery continues.

“When a long-term trend loses its momentum, short-term volatility tends to rise.
It is easy to see why that should be so: the trend-following crowd is disoriented”.
George Soros

The Covid recovery is likely to mean a prolonged period of uncertainty for economies and companies. The initial market momentum after Covid and subsequent recovery is stalling a little at the moment. This is not a long term structural problem, as most indicators point to a return to ‘normality’ (there goes that word again! What is normal anymore?), that being travel, consumption, leisure etc, within a year or so. But the global recovery is not taking place uniformly. Herein lies the problem. Some emerging markets for example are still suffering from high Covid infection and death rates and battling the pandemic. Supply issues mean that many raw materials in our Western economies are scarce and we are seeing price rises as a result, and while this continues it means that there are more risks for companies and individuals. This inevitably means more volatility in our investment portfolios than we have seen in the last two years, which have largely been positive.

My usual advice when we enter periods of volatility is ‘Don’t constantly monitor your investments’ – that well worn recommendation that doesn’t really help anyone’s anxiety. The fact that we now have 24/7 access to information can be a curse when it comes to your investments.

The value of your investment can go down as well as up
I understand nervousness around investments. Is my money going to be there when I most need it? Is it safe from fraud? Will I recoup those losses or are they lost forever? I invest my own money and like anyone I like to see numbers in black rather than red. But I also understand that it’s a matter of patience, time and calm, rather than frustration, anxiety and rash decisions, that will see you through any period of volatility. It should be noted at this point that most of you who are reading this newsletter will have invested through the Covid crash, which was markedly more worrying than the current pull back in prices. So, when looking at our portfolios it is always good to have perspective. You may remember from 2020 that crashes happen quite suddenly and dramatically in response to a very specific trigger, whereas pull backs in stock market prices are often talked about for weeks or months and hypothesised on for what seems like ages before anything actually happens.

Success in investments is not about whether you climb that wall of worry or not (we all worry about our money) but whether you make rash decisions based on factors which are outside your control.

Are you a person who is more susceptible to making rash investment decisions?
You might be interested to hear that the University of the Massachusetts Institute of Technology (MIT) have conducted some interesting research on personality types and decision making.

They wrote a paper in August this year, entitled ‘When do investors freak out? Machine learning predictions of panic selling’ and discovered that the investors who tend to ‘freak out’ with greater frequency fall into one or several of the categories below:

• Male
• Over the age of 45
• Married
• Have more dependents
• Self-identify as having excellent investment experience or knowledge.
• (It does bear mentioning that I fall into every category! – scary thought.)

In addition to the above, they identified other characteristics in panic sellers. Only 0.1% of investors panic sell at any point in time. However, when there are large market movements, they occur up to three times more.

Interestingly, 30.9% of panic sellers never return to reinvest in risky assets. However, of those that do, nearly 59% re-enter the market within six months.

The really sad fact is that the median investor earns a zero to negative annual average return after the panic selling. This is the most worrying statistic of all. The evidence is therefore clear: panic selling leads to losses.

But regardless of the figures and the logic coolheadedness just can’t complete with human irrationality, and the same mistakes happen again and again, even if logic dictates it should be the other way around. In one way, that’s why I am here. To help you navigate that mind swamp!

I am reminded of a few clients who contacted me around the time of the Covid market crash and said that this was a new world event, a new norm and that things would never be the same again. I encouraged them to ride the wave, and they are today sitting in a much better financial position then they were before. I had no way of knowing what would happen in financial markets, and I can tell you I did worry myself, but I do understand human nature after working in this business for over 20 years.

I do know that whatever event creates a crash, the only truth is that when markets fall there is an opportunity to buy more of the same at reduced prices! Capitalism is not going to fall, just yet!