John Husselbee

Is it worth waiting for a correction?

John Husselbee

Last week’s first interest rate rise in the UK for 10 years was widely trumpeted as a boon for savers, with deposit rates having been pinned close to zero since 2009. In reality, however, and even assuming banks pass on these higher rates, holding money in cash remains an unattractive option with inflation at current levels: as the chart below shows, people are not being paid to wait.

Is it worth waiting for a correction?

Source: ONS/Bank of England. UK Consumer Price Index & Bank of England Base Rate monthly from 1 January 2008 to 31 July 2017. 

The FTSE 100 Index also reached an all-time high last week. This poses a conundrum for clients, however. We believe many investors are currently sitting on the sidelines with their money in cash, possibly worried about an impending correction given that we have been enjoying the second-longest bull market in history.

While evidence shows that, over the long term, equities outperform bonds and cash, it is natural for people to worry they may be investing in the stock market just as shares might be about to fall in value (we wrote about some of the risks for equity markets in the article we emailed to you on 18 October).

Is it worth waiting for a correction?

While we believe people need to take some risk with their capital if they are looking to achieve financial goals, evidence shows trying to time the market is rarely successful.

All investors want to buy assets when they are lowly valued and sell them when they are expensive, but putting this into practice is difficult. There is a saying, which we agree with, that timing the market is a fool’s game whereas time in the market (which means keeping money invested in equities) is your greatest natural advantage. 

It is preferable, in our opinion, to invest for the long term and try to ignore the ebbs and flows of stock markets. Our analysis of the FTSE 100 Index (in the following chart) shows it has returned an annualised 5.68% over the last 20 years and £100,000 invested at the start of the period was worth £301,895 at the end.

A one-year delay in investing would have reduced this gain by more than £16,000 and waiting three years – perhaps fearing a correction – before investing would have cut more than £46,000 off the returns.

Compounding returns over long time periods, therefore, has a clear impact on wealth creation.

Is it worth waiting for a correction?

When building an investment portfolio for a client, his or her attitude to risk is a central consideration: asset allocation should be determined as much by how much someone is prepared to lose as by how much they want to gain. Some risk will always be necessary to achieve returns but taking on too much at the wrong point in life can be damaging for financial health.

Investing should not be about one size fits all. Consumers are demanding greater customisation in a range of fields, from trainers to cars: across the Mini range, for example, there are now 15 quadrillion ways to specify your vehicle, with 300 possible internal modifications and 300 external.

At Liontrust, therefore, we offer a range of multi-asset target risk portfolios to suit different attitudes to risk, investment objectives and time horizons and to enable clients to stay in the service through the accumulation and decumulation phases of their lives. In general, clients will move over time from the higher-risk, more equity-heavy portfolios as they build up savings towards the lower-risk end of the range in retirement as they begin to draw down this money.

Another potential attraction of multi-asset portfolios is the diversification they can provide you and your clients. It is natural for investors to focus on asset classes and funds that have performed well in the recent past but a diversified multi-asset portfolio should offer a complementary group of funds rather than a collection of last year’s winners.

This should enable portfolios to produce less volatile returns than one skewed towards a particular asset class. If equities are struggling, for example, exposure to asset classes such as bonds, alternative investments and cash should help to offset losses and smooth the overall performance.

We do not have a crystal ball and therefore cannot tell you for how much longer the current equity bull market will run or how large the next correction will be. What we can tell you is that no one else has the answers to these questions either.

For us, rather than trying to anticipate a correction, the evidence of history points to the importance of investing for the long term, staying invested through the ups and downs of markets and political events, building diversified portfolios and ensuring portfolios match the risk profiles, objectives and time horizons of each of your clients.


Disclaimer:

• This content contains information and analysis that is believed to be accurate at the date of publication but is subject to change without notice. Whilst care has been taken in compiling this content, no representation or warranty, express or implied, is made by Liontrust as to its accuracy or completeness. Some parts/sections of this content may been compiled from external sources. Whilst these sources are believed to be reliable, the information has not been independently verified and therefore no representation is made as to its accuracy or completeness. • It should not be copied, faxed, reproduced, divulged or distributed, in whole or in part, without the express written consent of Liontrust. • Past performance is not a guide to future performance. Do remember that the value of an investment and the income generated from them can fall as well as rise and is not guaranteed, therefore, you may not get back the amount originally invested and potentially risk total loss of capital. The issue of units/shares in Liontrust Funds may be subject to an initial charge, which will have an impact on the realisable value of the investment, particularly in the short term. Investments should always be considered as long term. • Any decision to invest should be always based on the final Prospectus and Key Investor Information Documents (KIIDs) and you should take independent legal advice if necessary. These documents contain important information which should be read before investing in any fund and they can be obtained, free of charge, here.

• Any performance shown represents model portfolios which are periodically restructured and/or rebalanced. Actual returns may vary from the model returns.  There is no certainty the investment objectives of the portfolio will actually be achieved and no warranty or representation is given to this effect.  The portfolio therefore should be considered as a medium to long-term investment.

Tuesday, November 7, 2017, 3:24 PM