With the UK general election settled, the focus has turned to the next stage of the Brexit negotiations. That means a revival in market commentary about the supposed crises that might follow the country’s exit from the European Union. Are these concerns a reason to sell investments and go into hibernation? Not a bit of it.
The truth is that crises are a familiar part of the investment landscape. Since 1990, we can identify 12 crises, summarised in the table below. On average, that’s one every two and a half years.
That sounds like a lot of crises. Yet over the period, the UK and US equity markets delivered a total annualised return of 7.6% and 9.7% respectively1. So, investors can face a high frequency of crises and still make good returns on the stock market.
This is the context in which we should place Brexit.
An intelligent way to respond to crises
Crises of one form or another are a part of the investing fabric. Of course, they do often lead to losses and shortfalls in the short term. But that doesn’t mean we should abandon the markets every time we see a crisis brewing.
That’s because, if we were to respond to weak markets by selling equities, we might miss out when the market improves. Similarly, if we’re quick to sell, human emotional bias makes it difficult to know when to jump back in.
Missing out on periods of good market performance can be costly in the long term. If we were to remove the top three percent of weekly increases (the orange lines in the chart, below), the average annual return since 1990 falls to -1.6% and 0.4% in the UK and US respectively. If you recall, the average annual return without these weeks removed was 7.6% and 9.7%.
Over this period, staying invested for the long term and soaking up the volatility was the better option.
Three tried-and-tested cures for the common crisis
Every winter, many of us get the flu jab to inoculate our system from the most harmful strains of the virus. We don’t separate ourselves from family or society, stop riding the tube or stop going to work. Rather, we confront the virus head-on and keep on keeping on.
An analogous approach is badly needed in investing. We don’t separate ourselves from risk, we engage with it. Nutmeg investment portfolios help investors to engage with that risk.
Here we’ve laid out our tried-and-tested remedies to help deal with whatever common crisis comes around:
- Take a long-term view and make regular contributions to your portfolio. This way you can enjoy the benefits of pound-cost averaging.
- Ensure your risk appetite is in line with your time horizon. Remember volatility is your friend. In long-term investing, the higher the risk, the higher the potential return.
- Stay diversified.
On the third point, there are two types of diversification to keep in mind:
- Asset diversity is achieved by including different assets. Nutmeg fixed allocation portfolios offer a well-balanced mix of assets across the risk spectrum
- Portfolio diversity is achieved by using variable weights for each asset. Nutmeg’s fully managed and socially responsible portfolios include a forward-looking element of diversification. Our experienced investment team actively assesses prospects of all asset markets and modifies portfolio exposure accordingly, while maintaining asset diversity.
Next time you see a common crisis, don’t panic
It’s in the nature of the media to present every new crisis with fervour, as well they might in order to sell the news. But should panic over a news story inform your investment? Whether the latest crisis concerns Brexit or anything else, remember our three tried-and-tested cures.
- Bloomberg, 05/01/1990-18/10/2019
As with all investing, your capital is at risk. The value of your portfolio with Nutmeg can go down as well as up and you may get back less than you invest. Past performance is not a reliable indicator of future performance.