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Three tips on investing in turbulent times

Oct 06, 2019

 

Between Trump, Brexit and the unrest in Hong Kong, you might think twice before investing. Eoin McBennett gives some tips for investing in uncertain times.

Looking at the headlines over the last two years, you could be forgiven for thinking that investors have experienced poor returns. It has been a rocky ride, as trade disputes between the US and China have escalated, the chances of a no-deal Brexit have risen, and the protests in Hong Kong threaten to undermine an important financial hub for China. All this should point to poor returns for investors, right?

On reviewing returns, however, we have found investors had done reasonably well over this period. Both European and American shares are up over the twelve months to the end of August, and investors in other asset classes like government bonds and gold have done well. The Irish stock market, however, has lagged more recently, affected by the ongoing uncertainty being played out in the House of Commons.

The truth is that heightened political risk often does not translate into lower market returns over the medium term. This is not to say that issues like US–China trade tensions or Brexit don’t matter; they do. Triggers for market uncertainty can come from a variety of macro-economic factors such as interest rates, inflation, unemployment and economic growth. One thing we can be certain about when investing is that there will be volatility.

So if you are looking for tips on how to grit your teeth and invest even when the outlook seems uncertain, here are mine:

1. Time in the market, not timing the market

Avoiding the temptation to time the market is perhaps the most important lesson for investing in uncertain times. American Century Investments have shown the effect on portfolios by trying to time markets. Their analysis highlighted that staying invested throughout a cycle resulted in the best return for long-term investors.

Investors in shares benefit from both capital growth and dividends. Over time, the contribution of reinvested dividends to your total return can be substantial, sometimes even contributing more than half of your return. Trying to time the market, or buy low and sell low, means you miss out on the power of reinvested dividends.

2. Diversify your investments

Diversifying your investments can shield you from some – though by no means all – of investment risks. Spreading your assets across a range of companies, countries and markets reduces your dependence on any one area, and the risk of one bad event making a dent in your portfolio. By investing in a range of asset classes, you can produce a portfolio which has smoother returns over time, and include exposure to assets which tend to perform well during times of uncertainty, such as gold or government bonds.

3. Don’t forget the cost of not investing

People tend to see investing as a binary thing, where you are either doing it and taking a lot of risk, or not doing it and taking no risk at all, but the truth is more complicated. By not investing, you run the risk that your money will decline in value as inflation erodes away at your wealth. The cost of things around you will rise over time, but with banks offering a meagre level of interest, your money will not keep up and will not be able to buy as much for you in future.

Investing before a market crash

Having said all this, I know people still want to know what happens if they pick the wrong time.

Let’s assume the worst and look at what would have happened if you only ever invested before a market crash. One of my colleagues has done just this for UK shares, running the numbers to see what would happen if you invested at the market peak right before the Asian Financial Crisis (1998), bursting of the dotcom bubble (2001) and financial crisis (2008).

After those three peaks, the UK market saw declines of 25%, 30% and 40%. You would be feeling pretty sick. But if you had invested equal amounts right before these three crashes, you would have doubled your money by the end of 2018. You can run the analysis for US shares and reach a similar conclusion. Even if you invest right before a market crash, staying invested over the long-term tends to pay off.

Make a plan

Investing in uncertain times requires us to recognise that our long-term financial needs are not going away. The need to save for a pension, your children’s education or any other financial goal, does not generally disappear overnight. Keeping that in mind should help to make investing in uncertain times easier, even when we are watching the latest news report. How to invest in uncertain times? Make a plan, and stick to it.

Eoin McBennett is an Investment Manager at Quilter Cheviot. This article is the sole opinion of the author.

This article was originally published in The FM Report.