Firstly, thank you for the positive feedback and suggestions received. It’s heartening to know that these communications are well received and also to be guided as to the areas where comment is most valued.
The first issue as the virus threat unfolded was slowing the spread to protect the NHS. There is now widespread acceptance that lockdown in the UK will continue for the coming weeks as it’s been an effective measure, albeit with multiple associated costs. Without playing down the many concerns we all have around lockdown, there is also the economic cost and resulting loss to portfolio value to consider.
Yesterday, 16th April, the FTSE100 closed at 5,628 marking a recovery of almost 15% from the March low and the daily swings in value have eased significantly in the last week. This is welcome good news.
It’s not therefore surprising that the political narrative is moving to detail the key requirements to ease lockdown. However, it remains unclear how these requirements will be met without either quick and accurate testing or a vaccination.
In the webinar Q&A one of the questions asked was if there is anything investors should be doing. The answer was to stay invested and stay diversified. For anyone reading this who didn’t hear it in the context of the webinar, it may sound slightly flippant (so please bear with me…).
Human nature works against good investment decisions. We all know that to make a profit we need to buy lower and sell higher, however our emotional response to loss often overrides this logic. When an investment falls in value, we worry the investment will continue to fall and there is a temptation to sell “before it falls more”. Selling simply crystallises a loss and subsequently prevents any participation in the recovery. To compound matters, human nature requires that before considering reinvestment we must see the value partially or fully recover. This is effectively selling low and buying high. While it’s easier said than done when watching values fall, it’s better to stay invested.
Portfolio construction is a complex process with many considerations, one of which is risk management. Our analysts therefore model different investment compositions, in a range of market scenarios, to achieve the best risk and reward profiles. This process determines how much of a portfolio is invested in each area, in other words, how the portfolio is diversified.
Inevitably some areas of investment will perform better than others – we know and expect this. The point is simply that portfolios have performed as expected, relative to market conditions. They have protected against the worst of these sharp downturns, in line with the risk mandate.
Most clients have detailed financial plans in place, underpinned by robust cashflow modelling. These models are a useful reference point for annual reviews and keep clients on track to achieve their financial and broader lifestyle objectives. These plans are stress tested against a number of scenarios including simulated market crash, to make sure that objectives are still achieved. Cash flow models can be presented securely, on line, with screen sharing (you receive a Zoom invitation). If you’d like to review your financial plan or cash flow model, please just ask and we’d be pleased to arrange this.
I’m conscious comment on financial markets is sparse this week (a quietly positive note!) reflecting the easing of recent, extreme volatility and some welcome recovery from the low. I’m equally conscious that quarterly corporate earnings (company profits) will be reported soon and are known to be poor reading. It’s widely considered that financial markets have already priced in this bad news, however, there may well be some surprises (both good and bad) which could easily see a return to more volatile markets in the short term. Ideally these will be countered by a credible UK government exit strategy rather than simply conditions which may lead to one.
Finally, I am reminded with every news broadcast that my minor homeworking and lockdown inconveniences are insignificant against the challenge and risk, faced by front line medical professionals and other essential workers every day. The least I can do is clap on a Thursday night and follow the government instruction.
I hope you and your family remain safe and well.
Regards
Kenny