The value of your investment can go down as well as up – it’s a statement required by regulation on almost every financial promotion, and it couldn’t be more accurate. This is because an investor accepts a higher level of risk to access returns above those of cash. In our opinion, whilst market volatility in isolation isn’t dangerous, making the wrong decision at the trough of a market downturn can be.
The S&P 500 has returned just short of 97% to Q3 2021 end from its March 2020 nadir of 33.72%. Over the last month, however, market volatility seems to be making a comeback with surging oil and natural gas prices, combined with anxieties over US stimulus tapering, causing markets to wobble contributing to a S&P 500 September 2021 return of -4%.
As a reminder, the US central bank had said it would purchase $120bn of Treasuries and agency mortgage-back securities each month until it saw ‘substantial’ progress on inflation and employment goals. Increasing consumer prices have ensured inflationary goals have been met and it now seems the employment goals are about to be too – the Fed has announced that the US jobs threshold has been “all but met”, paving the way for ‘tapering’ (a reduction in economic support) and leading to suggestions that the US central bank could announce a stimulus reduction as early as November.
In March 2020, one of our medium risk portfolios was seeing paper losses of 16.7%. Global equity markets as measured by the MSCI All Country World Index were down 33.52%. During this time Wealth Managers showed their value, fielding calls from concerned clients. The message was simple – hang in there, trust the process. The same portfolio that was -16.7% in March saw an annual 2020 return of +7.3% net of fees.
While volatility seems to be returning, the message remains true, with the last few weeks seeing more investment volatility than the rest of 2021. Nobody likes to see the value of their portfolio drop, but we need to remain rational and trust the process.
At the beginning of our consultative process, we work hard to ascertain four important metrics that guide us towards an allocation suitable for your needs.
- Capacity for loss
- Time horizon
- Goals and objectives
- Emotional Risk tolerance
Some of these metrics will vary from account to account. We may look to take a higher amount of risk in a client’s retirement accounts as the longer time horizon allows one to ride any waves of volatility before drawdown or you might have a more aspirational goal for a certain pot of funds, thus dictating the need to take more risk. More risk for one client could look very different to more risk for another as the risk budget will always be referenced to your personal emotional risk tolerance.
The MASECO consultative process is designed to ensure that you are comfortable with the expected volatility that inevitably comes with investing in the capital markets. Our portfolios are diversified by asset class and geography as, in the wise words of Nobel Prize laureate Harry Markowitz, “Diversification is the only free lunch” in investing.
On the contrary, investor behaviour is one of the most significant risks to investor returns. DALBAR researched the S&P 500 annualised returns vs the average equity fund investor’s returns and noted the S&P 500 outperformed the average investor by 1.8% annually between January 1st 1999 and December 31st 2019. Even more notably, the Barclays Capital Aggregate bond index returned a premium of 4.5% annually versus the average fixed income investor.
At MASECO we manage portfolios objectively rather than subjectively. The emotional costs associated with human behaviour may lead to wealth destruction, as shown by the below graphic;
When one tries to manage their own hard-earned funds there is always a possibility that emotional biases may come into play. Adopting a systematic approach based on what we know helps eliminate these costly behavioural biases. If you have any questions about your risk budget, please speak with your MASECO Wealth Manager.
