In previous communications I have flagged that I believe that volatility will return to the market, and that the relative serenity of recent equity markets will give way to choppier waters. This has broadly come to pass in 2018.

In previous communications I have flagged that I believe that volatility will return to the market, and that the relative serenity of recent equity markets will give way to choppier waters. This has broadly come to pass in 2018. Since the start of 2018;

• The US$ has moved from $1.25 to the euro to $1.15 (currently $1.17),
• German 10-year bond yields have moved from 0.7% to 0.3% currently, while US 10-year Treasuries have moved from a 2.4% yield to 3.1% in May (now 2.85%)
• Oil has shot up 66% over the past 12 months from $45 to $74 a barrel ($68 currently)
• Global equities are slightly up this year, but that hides some huge divergences; the tech-heavy Nasdaq is up over 13%, European equities are down 2%,  Chinese equities are down 15%, Emerging Market equities are down around 10%, and the narrow FAANGS index (Facebook, Apple, Amazon, Netflix and Google) is up 33% [c.60% over 12 months].
• The recently-hyped bitcoin is down some 50% 

The reasons behind this increased volatility are well known - the escalating trade wars, rising US interest rates, tightening global liquidity as Quantitative Easing comes to an end, Brexit, and Euro-related political fragility in Italy, Spain and now even Germany.   
 
The purpose of this newsletter is not to attempt to foretell the future short term path of investment markets, but rather to remind investors of a valuable lesson. Wealth isn’t primarily determined by investment performance, but by investor behaviour.
 
When stock market falls sharply, there is a tendency for people to make changes to their investment strategy without due consideration. Investors are misled by stock-market volatility and are done a dis-service by the short term noise many media outlets, financial journalists (and financial advisers) create. This noise encourages people to make emotional decisions about investing. 
 
Acting emotionally can be bad for your financial health. This is the finding of the Dalbar Quantitative Analysis of Investor Behaviour (QAIB) - an annual study that shows how investors perform relative to market benchmarks over time. The average equity fund investor consistently underperforms.  Why?
 
What tends to happen is that in falling markets, the average equity investor rushes to ‘safety’ (ie cash) and therefore crystallises a loss. When stability returns to the market, they buy back in (at the now higher price). This buy high / sell low runs contrary to the heart of investing, - buy low / sell high.



In the above, taken from the Dalbar QAIB Study 2018 the average equity fund investor under-performed the S&P 500 by a margin of 1.91% per annum over a 20 year period. In all periods measured the Average Equity Fund Investor under-performed the S&P 500. The Dalbar study places a significant portion of the blame for this under-performance at the doorstep of the individual investor, in particular due to emotional reactions to market turbulence. 
 
I believe that understanding this research, and acknowledging that we, as humans are emotional, and are subject to certain biases, is helpful when we are formulating an investment strategy or making investment decisions. By understanding and improving our investment behaviour we improve the possibility of more favourable outcomes when making investment decisions.  Irrational investor behaviour is typically triggered by some sort of stimulus… a geo-political event, previous market experiences, news stories etc. While underperformance is not entirely due to irrational investor behaviour, there are two behaviours for which evidence shows consistently that are detrimental to what would be regarded as a prudent investment strategy. These behaviours are the tendency to move into and out of investments too frequently and the tendency to time the market.
 
 An effective and reliable financial adviser should help to keep the emotion out of investment decisions, -  no matter how unattached to your investment you think you are remember that  investing is never, ever, a theoretical exercise; you're never half as detached from portfolio losses as you think you will be.
 
If you think I may be able to assist you in any way in relation to insurance, pensions, investing or tax, please drop me a line. I will be happy to help.