Timing the market is a fool's game, whereas time in the market is your greatest natural advantage.
- Nick Murray
Picture a man walking his dog in London. The man has done the same walk for years, starting at his home near Borough Market, strolling across London Bridge and ending at St. Paul’s Cathedral. The dog has boundless energy and never walks in a straight line. He leaps randomly from one direction to the next, stops to smell every leaf, barks at other dogs, and jumps on you for no reason. At any given moment, you don’t know what the dog will do, or which way he'll leap. His movements are totally unpredictable. But you know he's heading northeast towards the Cathedral, at about three miles per hour, and that he’ll eventually end up there – because that's where the owner is taking him!
This story is a great metaphor for how many people react to investments. At any one time, the markets are as unpredictable and jittery as the dog. Yet, with the owner in control, the ultimate destination is far more predictable. The astonishing thing is that many investors seem fixated on the dog and pay very little attention to their destination.
Therefore, we encourage our clients to pay more attention to their own destination (goals) and less to the dog (markets). As long-term investors, we are not and should not be concerned by what the capital markets do from year to year. That means we don’t listen to, or act on, short term market forecasts.
2017 was the year when pundits were proved wrong, again!
Investment analysts expected that financial markets wouldn’t repeat the strong returns they saw in 2016. They firmly believed that markets would react negatively to the political and economic events that occurred in 2017. They couldn’t have been more wrong!
The uncertain global economy, the political turmoil in the US and Spain, Brexit, and other factors, did not prevent markets from performing well. In the US, job vacancies reached the highest level since 2000. In the UK, the unemployment rate is the lowest since 1975 and eurozone consumer confidence is at its highest since 2001.
Equity markets, both developed and emerging, posted strong returns in 2017. The chart below provides a summary of the performance of the main asset classes over the last one, three and five years.
Engage FS Portfolio Performance
The portfolios presented strong returns with relatively low volatility. It follows an investment approach based on diversification, that also captures the premiums that the equity and bond markets offer. The following chart presents the three-year cumulative performance and volatility of our portfolios.
We’re very pleased with how the portfolios have performed. The investment markets have been rather generous over the past decade and it’s easy to be complacent.
Behavioural economists tell us that most investors suffer from recency bias. This happens when investors evaluate their portfolio performance based on recent results and make incorrect conclusions about how the stock market behaves. The investment markets have performed well over the past few years and many investors have forgotten the pain caused by the global financial crisis. Many seem convinced that we won’t experience anything remotely resembling that period of extreme market volatility. But the reality is that it’s unrealistic to expect this positive trend to continue indefinitely. Indeed, if the past is anything to go by, a market downturn is more likely than ever – although no one can forecast exactly when this will happen with any degree of accuracy.
Accordingly, it’s reasonable to expect that over the next few years, return on most asset classes will be much lower than we’ve seen in the recent past. The truth is there will always be risks and unknown events that catch investors off guard. Trying to predict exactly when equity markets will experience a sharp decline is a fool’s errand. But given the cyclical nature of returns, the tide has to turn at some point. ‘But of that day and hour knoweth no man…’ to misquote the good book. Instead of attempting to make predictions about the future, we continue to keep a close eye on our clients’ long term goals. This is an ongoing process, and we continue to work very hard to ensure that our portfolios are positioned to deliver consistent, long-term returns, without taking undue risk.
Engage Portfolio vs Masters of the Universe
The most important benchmark for an investor is their long-term goal. However, it’s interesting to compare our portfolios to the wider financial industry.
To do this, we compare the efficient frontier for the Portfolio over three and five years, to some of the most prominent multi-asset funds. The efficient frontier curve is simply the trendline created by plotting the cumulative performance and volatility of all our portfolios over a given period. The curve plots the level of return delivered across portfolios set against the unit of risk taken to deliver this return. It shows how investors in those portfolios are being systematically rewarded for every unit of risk (volatility) they take.
The charts show that, for each unit of risk taken, the Engage FS Portfolio captures more of the market return than most of the so-called Masters of the Universe. All but one, underperformed the Engage FS Portfolios on a risk-adjusted basis over three and five years.
Let’s be clear, it’s not that our portfolio outperformed the market. It’s that theirs underperformed the market. Our goal is never to beat the market, but to avoid the market beating us. The objective is to capture market return over the long term.
It’s our belief that the capital markets almost always reward patient investors in the longer term. But, many investors miss out on this because they panic and bail out when the going gets tough. Accordingly, it’s important that we don’t become complacent. We need to recognise that there’s a good chance returns on capital markets could be lower than they’ve been in the recent past and adjust our plans accordingly. As always, we focus on the longer term and our approach remains to invest in well-diversified portfolios, while seeking to manage risks.