Time in, not timing

The increase of risk profiling

As humans we are (mostly) wired to have a greater aversion to losses than desire for gains. Put more simply, we feel greater pain when registering losses than gains. This is the primary reason for the increase in risk profiling. Historically you would have had a conversation with your Wealth Planner and a “feel” for the level of risk you were willing to take would be established. This is now a much more robust process. However, when we see sharp market falls, even this more rigorous process is questioned.

During the past 50 years, global stock markets have seen major bear markets (greater than a 20% fall) on no less than eight times. Kicking off the drawdowns was the OPEC Oil Price Shock in the early 70s, a drawdown of just over 46%. The 1980’s had two major events, with Black Monday being the most often quoted, despite being one of the smaller falls (-23%).

Greater falls

Moving into more recent history, The Dot Com Bubble -49% and the Great Financial Crisis -59% saw much greater falls than any of the above. In what has often been quoted as one of the longest bull runs in history, we have also had two major pull backs – the European Crisis (-24%) and the Oil Price collapse (the previous one -20%).  The Covid-19 falls, using the same peak to trough methodology, were -34%. Of course, we are not out of the woods yet, and we may indeed see some further falls, which is why we have positioned portfolios slightly more defensively.

Therefore the question remains, if there is the possibility of further falls, why not take all risk out of our portfolios? The simple answer to this is no one should not. Were we to break down the falls in equity markets into specific types, we would have three: structural, cyclical and event driven. Our analysis of these three types of bear market suggests that the current falls are event (Covid 19) driven and that the recovery from event driven falls are often much faster than structural or cyclical.

This leads me onto the title of this note. What is more important, timing the market –  i.e. being able to move swiftly in and out of risk assets, or, time in the market, a buy and hold strategy within a given risk profile?

Global Bear Markets Compared

Right strategy

Here, there is some strong evidence that holding one’s nerve, whilst incredibly difficult, has always proven to be the right strategy. A study from Schroders highlights this perfectly. A £1,000 investment in 1989 invested in the FTSE 100 would by January 2020 have been worth £13,485. Conversely, if one had been unfortunate enough to have missed the best 30 days of returns over that same period, the return would have been £2,958 – a difference of £10,527.

Of course, it would be incredibly unlucky to have missed each of the 30 best days over that time. So perhaps even more startling is the result of missing just the 10 best days – which often occur very close to significant falls. Here the number is just as startling with the return being £6,947, almost half the value of remaining invested. Whilst it is human nature to focus on the falls we have seen, it is worth noting that we have also seen on of the largest one day rises in the FTSE this year: 9%!

Yes, there will be dark days ahead both from a humanitarian and financial perspective, but we will get through this. We have seen recoveries from every previous crisis and this one will be no different. Our advice is to remain invested with the level of risk you set out on your journey with us. Despite the recent losses, we continue to believe that we can achieve the long term return guidelines associated with each risk profile we manage.

Paul Surguy | Head of Investment Management