How will Markets Fare in 2020?
January 12, 2020
The Market has No Memory From Year to Year
I was catching up with a client very recently and he asked what were my thoughts for the markets in 2020? Well, just like flipping a coin, the market has no memory from year to year. If head comes up 10 times, what’s the chance of head coming up again? That is not to say that investing is the same as flipping a coin, with a 50/50 chance that you’ll have a positive or negative return in any particular year.
If we look at every January, there are predictions on how the markets will fare in that particular calendar year. Take last year (2019) as an example, it started with many anxious, gloomy predictions with sentiment carried over from 2018, as it was a bad year overall in 2018. Contrary to the apprehensive predictions, although our portfolios were negative across the range for 2018, in 2019 we saw returns between 8.40% to 20.86% (before platform and advisory fees). Some investors decided to sell to cash and wait for prices to go down even further. They thought after many years of high returns, they would time the market (i.e. to sell and buy back when the time is right). The problem with market timing on a diversified portfolio is that you have to time every single asset class right. Not just when to sell, but when to re-buy. If you had 11 asset classes, you would have to be right 22 times - a very difficult game to play. Investors place far too much emphasis on trying to avoid the market falls but not enough on the recovery or gains. Missing out on big growth has as much impact on a portfolio as losing that amount.
The Key: Invest with a Long-time Horizon & Understand Your Portfolio
Two important messages. Firstly, investing is a long-term game, but what does that mean? There is plenty of research to support the probability of making real returns (i.e. net of inflation) increases as you hold investments for longer, e.g. 5 plus years. You stack the odds more in your favour. Secondly, timing the market for a diversified portfolio is a dangerous game, instead, focus more on understanding how your portfolio is structured (how diversified, how much liquidity, fund type, how it is priced etc) and consider whether you are comfortable with how it behaves (i.e. the ups and downs) over the long term.
Chosen with Care
Each of our portfolios have a different aim of delivering a range of risk and return outcomes. They are well balanced, capable of absorbing a range of economic stresses. Our Portfolios were historically appropriate and built with a long-term knowledge of how the global markets operated. We help clients realise the difference between temporary volatility and permanent loss.
Successful investing is about having the right strategy to ensure you have long-term financial freedom.
Risk Warnings:
The information contained in this article is intended solely for information purposes only and does not constitute advice. The price of investments and the income derived from them can go down as well as up, and investors may not get back the amount they invested. Past performance is not necessarily a guide to future performance.
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