In this mini-series of blogs leading up to a potential Brexit, where we’ve considered the importance of political risk and the realities of the global equities market, we’ve demonstrated that although the headlines may make us feel as if we’re living in unprecedented times, history tells us otherwise.
That’s not to downplay the risks of Brexit or the global rise of populism, which have been cited by economists as causes of ‘uncertainty’, but it’s more an acknowledgement that ‘normality’ by definition, is uncertainty.
How can that be?
If we analyse economic performance over the last 40 years, it’s easy to see that the ‘normal’ cycle is to have long bull markets followed by sharp bear markets with plenty of political upheaval in between. It’s rare indeed to have a long period of slow growth or stagnation and political stability across the world.
It’s human nature to feel as if something was not as important if we didn’t live through it, so a thirty-year-old will have little appreciation of the ‘87 or ‘99 crashes. To that individual a Trump government and the prospect of a hard Brexit would feel unprecedented, but to a sixty-year-old who had lived through the market crash of ‘87, the disintegration of the Soviet Union, Black Wednesday and the dot com bubble this will feel much more ‘normal’.
Blocking out the noise
The economic cycle tends to be expansion, boom and downturn. That can occasionally lead to ‘bubbles’ where a particular asset becomes overvalued (think dotcom in 1999 and sub-prime mortgages in 2007) and there’s no easy way to deflate the bubble, so the bubble bursts and the economy experiences a downturn and in some cases a recession.
Please note this is not intended as a commentary on current market conditions, rather a reflection on the last 30 or so years of performance in the markets. So, retaining a sense of perspective when investing is essential. Investment managers are affected by political factors, like everyone else, but they seek to block out the noise to focus on longer term returns, giving them the perspective of someone who has seen it all before.
What about investing at the right time?
Investing in the good times can feel like the right thing to do because there’s less negative press but there’s a chance that you’re investing at the top of the market – and that’s famously hard to pinpoint. Likewise, in a falling market with plenty of negative press, there will be an optimum point to invest as future rises in value will generate returns.
This is why it’s so crucial to see investments as a long-term play. A medium to long term investment is likely to see off any short-term impacts so you can enjoy the long-term benefits of being invested.
Not all recoveries are created equally
What economic cycles tell us is that when things get bad, they will recover, but that recovery is not spread evenly across the economy. Some geographic locations, industries and sections of the population will be better served by the sources of growth in the next growth market than others. Examples from 2007/8 include house prices, where the South of the country has experienced significantly more growth than the North.
That’s why the skills of investment managers and diversity in investments is so important. The advice we provide is focused on building wealth over the medium and long term, but we need experts with laser-sharp focus on investment performance to ensure these plans can be realised by managing the ups and downs of economic cycles.
If you look at the performance of different asset classes over the past 94 years you can see that sticking with one particular asset class over that time would have made for a bumpy ride, so a mix of assets tend to lead to a smoother overall performance and ensures that in the good times and the bad your investments are diversified to help manage risk.
What's 'normal' in investing? Uncertainty. Investing in the good times and the bad, we look at risk...