March 2022 – Riding the 2022 investment Roller Coaster
“The more emotional the event is, the less sensible people are” (Dr Daniel Khaneman, 2002 Nobel Prize Winner for Economics)
I know it can be gut-wrenching to see your investment or pension take a sudden dive. Many investors have seen some healthy gains over the last few years, so when you see your investments dip the temptation to sell can be overwhelming as emotions take over. Our fear of loss is far stronger than the euphoria we feel when our investments are doing well. But selling in a falling market only serves to lock in losses and this can have a very negative impact on your ability to achieve your longer-term goals.
From time to time, stock markets go through periods of uncertainty due to events such as Covid 19, and now the Russia/Ukraine conflict. This is known as ‘systematic risk’ as it cannot be diversified away. The sharp falls that can be experienced at such times are understandably unsettling for investors. They can even tempt some investors to change their long-term plan by selling their investments. However, stock market volatility does tend to be short lived. Therefore, most experts agree that the best course of action is to sit tight through these unnerving periods.
Those who sell or delay making new investments when stock markets become uncertain are actually employing a strategy known as ‘market timing’. The intention is often to invest once stock markets have calmed down or to buy when stock markets have gone even lower. This can be a very dangerous strategy. Sharp falls in stock markets tend to be concentrated in short periods of time. Similarly, the biggest gains are often clustered together. It is also quite common for a large gain to follow a big fall (or vice versa). Take a look at the five-year FTSE 100 chart below. You can clearly see the sharp drop in the markets on 23 March 2020 when the UK went into Lockdown due to Covid 19, followed by steady growth since. The 2020 drop puts the current dip into perspective, and we can already see that markets have improved since January 2022.
An investor who tries to anticipate when is the best time to invest runs a very high risk of missing the best gains. This can have a big impact on long-term returns. Fidelity have analysed the average annual return from the UK stock market over the last 15 years. As the chart below shows, missing just the best ten days over this period would have cut your annual return substantially. Timing the stock market is extremely difficult. As you can see from the chart, the best policy is usually to stay fully invested over the long term.
Let’s have a look at the impact of missing the best 10 to 40 days on the global markets over the last 15 years …
Investment losses are painful, but if you can stay focused on your goals, rather than obsessing over monthly valuations you will feel better, and provided your portfolio is well diversified in investment funds that match your attitude to risk you will see your portfolio rebounding when the markets recover. Working with a Financial Adviser who is qualified and experienced in investment and risk can help you steer through volatility and stick with your plan. It’s also important not to ‘micro manage’ your portfolio … checking values daily or even weekly will only prove to be a stressful exercise!
So, on the basis of remaining invested, let’s look at what’s going on in the world and the potential effects this could have on investment returns…
The Kremlin appears to be increasingly prepared to deal with Mr. Zelensky — in part because Ukraine’s resistance on the battlefield is leaving it no other choice. With peace talks held in Turkey this week, interestingly, although it is a NATO member, Turkey has refused to put in place sanctions against Russia, whilst at the same time offering military support to Ukraine.
Syz Bank chief investment officer Charles-Henry Monchau outlines four possible outcomes of the Russia/Ukraine situation…
Scenario 1 – Russia succeeds
Russian energy supplies are likely to stay limited, oil and natural gas prices are likely to stay high and should keep inflation higher for longer. Supply chain disruptions are expected to be significant and probably the longest since WWII in several industries.
The Fed is likely to hike rates but probably less than anticipated. The European Central Bank (ECB) is unlikely to hike rates despite energy prices keeping inflation much higher than the ECB target.
This scenario does not involve a material deterioration from where we currently stand in the markets with US equities likely to outperform the rest of the word.
Scenario 2 – A negotiated deal between Russia and Ukraine
Should a ceasefire take place, some of the sanctions will be progressively lifted but not all of them. Inflation is expected to peak in the first quarter and then start to normalise, although it is likely to stay above central banks’ target for some time. Central banks will seize this window of opportunity to tighten monetary conditions.
With a ceasefire, energy and food prices are likely to revert back to pre-crisis levels and global equities are likely to make up some of their recent underperformance.
Scenario 3 – A Russia-NATO armed conflict including the use of tactical nuclear weapons
This is by far the ugliest scenario both from a human and macroeconomic perspective. A deepening crisis would most likely result in massive energy supply cuts to Europe and a trade blockade on a global level. Central banks would be forced to move back into a monetary policy easing cycle (Quantitative Easing “5” in the US and more money printing in Europe & Japan) instead of tightening.
This would lead to a full-blown global recession.
Scenario 04 — A coup against Putin
The sanctions and isolation of Russia by the West might be the catalysts that trigger a coup against him. The New Russian leaders might then negotiate a truce or prepare an orderly retreat enabling all sanctions to be lifted.
This could lead to a resumption of global trade, an easing of supply chain disruptions and a boost in consumer spending thanks to a dramatic drop in energy prices. Central banks would then look to hike rates as planned but financial conditions would improve as credit conditions would be loosening again.
This would be good news for equity markets as investor sentiment improves and the areas of the market that have been suffering the most over the last few months (European banks and technology stocks) would most likely outperform. Russian assets would enjoy a spectacular recovery. Whilst Government bonds, the dollar and commodities would underperform.
Diversification, time and patience!
Whilst we continue to have a keen eye on ‘systematic risk’, we have seen some good growth from many of our underlying investments, even when taking into consideration the current dip. Diversification, time and patience is key!
A patient approach will offer better results whilst ensuring your portfolio is well diversified will offer the best protection from individual stock risk and the best potential for long term growth.
If you are wondering about your investments and would like a qualified investment and risk specialist to review them, or would like to review your whole financial structure and consider alternatives to make sure that you are set up in the most tax efficient way please contact firstname.lastname@example.org
Speed Financial Solutions are a highly qualified financial services provider looking after clients throughout Spain and the UK. We provide a discreet and comprehensive service to individuals, and our service is tailored to suit your needs taking advantage of tactical opportunities as they arise in respect of your pension planning. We seek innovative solutions for our clients and employ our skills, based on many years of experience, to apply tax legislation to your advantage. Our relationships are built on trust and mutual respect. We are ready to answer your questions, giving you the confidence you want when dealing with a sensitive issue such as discussing your pensions, investments and savings.
Our Principal, Andrea Speed, is a qualified Discretionary Investment Manager specialising in Investment and Risk, Taxation and Trusts, and a qualified Pension Specialist. Andrea is also a Fellow of the Chartered Insurance Institute (CII), which is the world’s largest professional body for insurance and financial services in the world.
Fellowship is the highest qualification awarded by the CII (Level 7) and is universally regarded as the premier qualification. It is a major achievement in the financial industry and demonstrates the acquisition of skills and knowledge at the highest of levels. Along with a Fellowship, Andrea is a CII Chartered Financial Planner.
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This communication is for information purposes only based on our understanding of current legislation and practices which is subject to change and is not intended to constitute, and should not be construed as, investment advice, investment recommendations or investment research. You should seek advice form a professional adviser before embarking on any financial planning activity. Whilst every effort has been made to ensure the information contained in this communication is correct, we are not responsible for any errors or omissions.
Andrea J Speed FPFS (DM), M.A.
Principal, Fellow and Chartered Financial Planner
Speed Financial Solutions
30 March 2022