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

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

The Press and Journal (North-East) - - MONEY -

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 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.

“Savers re­tain in­vest­ments through thick and thin”

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

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