When The Rules Change


It’s just over six months since we published our winter 2020 edition of Vista, but goodness me, it feels like a different era. The funny thing about investing is that whilst things do change, timeless truths remain relevant. But no one sends you an updated rulebook or rings a bell when things are different.

It has become a cliché to say that this year’s events are unprecedented and the future more uncertain than ever. I’d take issue with the last part of that, the future is always uncertain (back at the start of the year it was arguably more uncertain than now, just compare the start of year forecasts to the outcome if you don’t believe me). Human beings naturally abhor uncertainty and yearn to do what we can to eliminate it. Investing is always about the battle to embrace uncertainty and avoid overpaying for certainty (eg by divesting from equity markets and allocating to cash or low risk strategies).

A lot of the basic lessons of finance and investing seem to have been turned on their head right now - negative interest rates, central banks funding governments, buying corporate bonds. What should investors take from this? Does the standard finance and investing thinking still apply? Or have the rules changed in a world of negative interest rates and unlimited support?

One of the key skills I’ve found advising investors over almost two decades is trying to identify what the timeless truths are that remain unchanged, while balancing that against changes in market regime, circumstances etc. Some things do change, we must adapt to survive.

Three takeaways for investors in today's environment

1. The game of investing is all about living with unexpected surprises.

The deeper lesson in Kahneman’s apparent truism is that all too often we learn the specific lesson when we should be learning the general – for example, “don’t own airlines in a pandemic” vs the broader lesson that unexpected large-impact events do happen and equities can fall substantially.

2. Understand your “why”.

If you aren’t clear on your objective(s) then you will struggle in investing at the best of times (and these are not the best of times). If you have defined your objective properly you know when you have “won” and can take money off the table. You also need to be clear on the role of each fund and asset in the portfolio - why is it there? It might be for growth, diversification, income or risk management. Without this clarity of role, it will be hard to assess whether the fund is “doing its job” in different market environments, which can lead to conversations “going round in circles” in the inevitable tough times.

3.Avoid “either/or” thinking and resist market timing.

It’s easy to be pushed into a false either/or dichotomy by the framing of a question or proposal.

For example, a UK investor who wishes to diversify equity holdings from the UK more globally can easily get pushed into wrestling with the relative valuations of different markets, the future prospects for one market compared to the other, the past performance, and thinking about trying to find the right time to make the switch.

Avoid all-in, all-out thinking and pinning everything on one particular narrative (whether around the economy, GDP growth, tech stocks, valuations etc). It might sound good but will probably be wrong.

Investing is never about all-in or all-out, there are a range of degrees available to us, we can implement changes gradually to avoid either/or and moderation / diversification remain timeless pillars.

Is it really different this time? 

A big problem here is the moral authority of the famous statement “the most dangerous words are - this time it’s different” This can be an excuse for a lazy status quo bias, a false comfort that we don’t need to think about how we may need to actually change, things are always different, every time. It might not make sense, but we have to get to grips with the world as it is, not how we’d like it to be. 

In this edition, we’re bringing you 8 articles helping you focus on what matters most and make sound decisions in what is one of the most difficult market environments many of us will have experienced to date.  

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