What’s scary isn’t the same as what’s important
Ben Kumar, Senior Investment Strategist
“Do you want the good news or the bad news?”
Unfortunately, you don’t really have a choice. Your brain is only interested in the bad news.
And unfortunately the world is a scary place day-by-day. We are bombarded by negative news – studies estimate that just 10% of daily news stories are ‘good’1. And those studies don’t include what people are reading on Twitter and Facebook!
There’s a lot of messy psychological stuff at work here. Our brains are designed to engage more with negative news than positive news, so media outlets keep it coming, swamping our optimism with every click and swipe we make.
2022 has been dreadful for this. If you’re not reading about the war in Ukraine, it’s only because you’re watching the UK Conservative party have a full-scale public identity crisis, or the price of petrol slowly creeping towards £2 per litre, or are queueing at an airport, or worrying about another wave of COVID. Our investment approach in the face of such hysteria is to stay informed and engaged, while not getting overexcited about any single outcome. Arguably that has been even more difficult than usual in the first part of 2022.
We’ve got a few techniques which help us take the long-term view – going for a long walk without your phone is top of the list, or getting lost in a history book or science-fiction novel. Living in the short-term is just too stressful, and genuinely reduces our ability to make the sensible long-term choices we need to make.
True long-term trends
And we can end up missing the true long-term trends if we just focus on the short-term. One of our research partners, GaveKal, had a great example of this a few years ago. They asked their readers what the most important event of 2007 was for financial markets.
Most of their readers are investors of some kind, so in one form or another, the answer was “the Global Financial Crisis”. That seems fair enough. We’re arguably still dealing with some of the fallout. Surely historians of the future will look back and pick that out as the key event of the year?
Perhaps not. Although it was 15 years ago, that is still a short-term way of thinking. Financial crises come around quite often (almost annually, if you’re from Argentina or Venezuela). They leave their scars, but tend not to change the world. No, the truly important event of 2007 was when Steve Jobs and Apple launched the iPhone, completely changing the way that we interact with the world around us.
Staying diversified and staying the course
Of course, in 2007, no one realised that the iPhone was as important as it has proved to be. Apple shares fell along with everything else, down 50% by 2009, along with the US market.
Since then the world has moved on from the financial crisis – the global equity market has quadrupled since its 2009 lows2. But Apple shares are up 56 times. Long-term trends trump short-term crises.
Our investment process is designed to capture these kind of long-term trends via our strategic asset allocation, while mitigating the potential damage from short-term crises with careful use of our tactical abilities. This can include tilting the asset allocation towards particular opportunities, or partnering with active fund managers.
Strategic Asset Allocation
Our strategic asset allocation has two key benefits. First, it keeps us invested at all times. Over time, financial markets reflect long-term trends in the world. Apple moved from being less than 1% of the US equity market in 2009 to nearly 7% today. That’s why, more than anything else, staying invested in times of crisis is important, as it lets you capture these global trends. Having a plan for staying invested is essential.
Secondly, our strategic asset allocation keeps us diversified. It’s difficult to identify where and what the genuine long term trends in the world are going to be. In 1989, the world was obsessed with the fall of the Berlin Wall, and the end of the Cold War. But in the mountains of Switzerland, Tim Berners-Lee had just created the World Wide Web. Which mattered more?
Sometimes even a century later, it’s tough to know what’s important: 1928 saw the discovery of penicillin and the launch of world’s first television station. I’m not sure I know which has been more important to the development of society. So we need to make sure we’re invested in a little bit of everything, regardless of what seems most important at the time. A broadly diversified asset allocation keeps lots of fingers in lots of pies.
Tactical adjustments and active managers
We use our tactical flexibility to adjust our long-term allocation to short-term events – think of it as trimming the sails, rather than changing course completely.
This allows us to take some profits when we see an opportunity, or look to deploy some dry powder into undervalued opportunities. For example in 2020, with COVID-19, we added to positions in high yield bonds and investment grade bonds through March and April, and then rotated these into some of the less expensive equity markets and sectors through the summer. By summer 2021, we were cutting back on these assets with markets having rallied strongly – and excitement about a global boom growing.
Tactical flexibility also lets us look for attractive entry points to some longer-term themes. So with healthcare, which we think will be a huge theme for the next decade, short-term noise around the US election in 2019 gave us a chance to build a long-term position in healthcare companies at excellent prices.
And our long-term approach extends to our investments with active managers. Where we use active managers, we want people who invest along the same time horizons as we do – capturing trends and themes that shape decades, rather than worrying about beating their benchmark in any given year. Sometimes that means they’ll be holding out-of-favour positions, but if they’re sticking to their guns and their process, we’ll stick by them.
What will be the defining event of 2022 for financial markets?
It feels tempting to say Russia and Ukraine. But the truth is that may just be a geopolitical blip. What if it’s the shift in paying workers reducing inequality? Could it be the downfall of Facebook and Twitter? We just don’t know, and may not know for years.
So we rely on our investment process. Remaining invested, across lots of different sectors and regions, while looking to mitigate the damage in sharp drawdowns, so that our clients have an easier time thinking about the long term. It worked in 2008, and through Brexit, and COVID-19, and so far in 2022. We think it will keep on working for the next few decades too.
Running your own model portfolios? A recent webinar may be of interest. Having built up over a decade of experience, we understand the challenges and pain points. Join the team as they look back at what we’ve learned along the way.
1 G. Lengauer, F. Esser, R. Berganza, Negativity in political news: A review of concepts, operationalizations and key findings. Journalism 13, 179–202 (2012)
2 Data from 01/03/2009 to 30/06/2022
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