After the ‘year nothing worked’, investors should reappraise risk

Volatility can be a good thing says Bryan Innes, founding partner of Lockhart Capital Management

Last year saw great turbulence in financial markets where not a single asset class managed a return of more than 5% in US dollar terms.

It is the first time this has happened in more than 50 years, which is why 2018 is being called “the year nothing worked”.

Unusually, there was little by way of returns from diversification.

It is worth reflecting that in September the main US equity market was up 10% for the year before hitting a low in December on the back of worries surrounding US Federal Reserve overtightening and US-China trade frictions.

Stocks around the world were down by 20% on average.

It is easy to fear even more uncertainty and potential negative returns in 2019.

There is a view that the Fed has underestimated weakness in the US economy, the brittleness of US interest rate-sensitive assets/sectors and the effect of slowing global growth.

Add in Trump and Brexit and it is understandable that investors fear a return to the falls of 2008 or worse. No one can predict what will happen.

Market volatility is nothing new and should be welcomed as it helps to

“Savers retain investments through thick and thin”

generate future investment returns.

Every year there is a new risk to be considered and 2019 will be no different.

Market fragility probes the investor and questions if they or their advisers are doing everything they can for them, and if the risk to which they are exposing their assets is appropriate.

Determining the risk you are exposed to should be driven by your personal financial situation and objectives, rather than a view based on investment attitudes and likely returns.

Aligning your financial plan to investments may lead to you taking less risk to achieve goals, which cannot be bad.

Structuring a bespoke plan that takes account of capital/income inflows and outflows over time will allow informed decisions to be made around risk and expenditure.

You must then put together an investment portfolio that can embrace volatility in benign conditions, while protecting you from negative downsides when markets are stressed.

Advice over the years suggests that savers retain investments through thick and thin on the basis that this will deliver the best long-term returns.

While the sentiment of this is correct, if the portfolio has little bearing to the challenges of today, time will have next to no effect on the return.

Market composition today is dominated by algorithms and high frequency traders – a far cry from even five to 10 years ago.

With lower growth and greater volatility expectations going forward, portfolios need to be more attuned and positioned to benefit.

YEAR TO FORGET: Stock markets worldwide fell 20% on average in 2018, in part due to US economic fragility