Why choosing not to change portfolios is an active decision

James McManus


read 3 min

You will often hear investment professionals talk about the importance of staying invested through turbulent markets, ignoring the ‘market noise’, and focusing on the long-term goals for which you are investing. But why is this? 

At times of market volatility, when there is a lot of noise about low points, it can be difficult to focus on the long-term investment outlook. The following charts show the annual return an investor would have received if they had remained invested in UK or US equity markets for the entire calendar year, for each year between 2000 and 2020.  

The charts also show the maximum drawdown for these markets in each calendar year – in other words the difference between the peak and the trough in returns, or the highest possible loss investors could have incurred during the year. 

UK equity market: Calendar year returns vs intra year decline  

Source: Macrobond, S&P Financial, FTSE. 31/12/1999 to 31/12/2020. Annual returns & drawdowns use total return indices in local currency but do not account for fees. 

The dots marked on the charts show that in each calendar year there were periods where markets had significant declines, yet the bars show that had investors remained invested for the whole year they typically would have experienced positive returns.  

This demonstrates the importance of looking beyond short-term market moves in pursuit of long-term goals – selling at any of these low points could have resulted in investors being significantly worse off. 

US equity market: Calendar year returns vs intra year decline  

Source: Macrobond, S&P Financial, FTSE. 31/12/1999 to 31/12/2020. Annual returns & drawdowns use total return indices in local currency but do not account for fees. 

The two charts also show that volatility is a natural part of investing – even in the best years for market returns, there have been periods where the market experienced negative performance.  

Selling an investment, or similarly de-risking a portfolio, would have served to lock in this loss and potentially move investors further from their investing goal, especially when compound returns are taken into consideration. History tells us that markets do recover short term losses, and thus investors can be better off staying invested for the long term. 

In the UK stock market (FTSE 100) going back 20 years to 2000, there have been 12 years that returned positive full year returns. However, in 11 of those 12 years this was despite a drawdown of 5% or more during the year. Similarly, the US stock market (MSCI USA) had 16 years with positive calendar year returns between 2000 and 2020, 15 of which were despite a drawdown of 5% or more within the year. 

The wisdom of staying invested during volatility 

Professional investors are aware of these facts, which is why they often don’t make changes to portfolios during periods of market turbulence if they can avoid it. However, inactivity doesn’t mean they are taking an inactive approach to portfolio management. 

At Nutmeg, for example, our investment team continually reviews macro-economic and market data to ensure portfolios are positioned appropriately for our expectations of the road ahead. Our investment approach is to focus on the fundamentals of the global economy rather than just short-term market moves largely driven by sentiment. 

Should the fundamental outlook change, our investment team will act to re-position portfolios. However, sometimes the best action one can take in a period of volatility is to remain invested, and our team may choose, having reviewed portfolios, to make no changes. 

Risk warning: 

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. 

Was this post helpful?

James McManus
James is chief investment officer at Nutmeg, having joined in 2015 from Coutts & Co. A self-confessed ETF geek, James is regularly quoted in the national and industry press and has been voted one of Private Asset Manager’s ‘Top 40 under 40’ in each of the last three years. James holds a BSc in International Business from Nottingham Business School, the CFA UK Investment Management Certificate, and the CFA Certificate in ESG Investing. He can be found tweeting @j_a_mcmanus

Other posts by