Emily Keenan

It is a simple statement that the decision to invest in the first place provides an opportunity to protect hard earned savings from inflation, and perhaps grow further. It is not easy, however, to have the foresight, as well as the discipline to deny oneself spending today for the opportunity of a better tomorrow. It is also not easy to work out how much one might want, need and be able to invest in stock markets to help fund future spending goals. Getting this right is key and where good financial advisers can add value.

It is simple that stock markets act as a core driver of returns in an investor’s portfolio, and that a good place to start for stocks is the structure of the global markets, which defines the basic country, sector and company weights and offers broad diversification.

It is also simple that high quality bonds act as protection from economic turmoil and help to smooth returns.

It is, however, not easy to know what evidence to look for in order to gain an understanding about what types of long-term investments typically improve a portfolio’s structure. This comes with the need to build an understanding of the risks one wants to be exposed to through time.

It is also not easy to decide which bonds are deemed to be defensive enough in nature to be considered an insurance policy against the uncertainty inherent in stock markets.

Finally, it is a simple concept that a low-cost fund structured to capture the target strategy gives investors a better chance of achieving their investing goals relative to a high-cost one.

It is, however, not easy to regularly screen for which funds might be best positioned to capture the returns of each part of the market, or to understand the trade-off between the management costs of a fund and the opportunity cost (i.e. what could have been) of omitting an investment. It is harder still to implement a thorough and regular investment oversight process, which is required to maintain confidence in the approach.

Figure 1: Investing can be simple, but that does not mean it is easy to do

Source: Albion Strategic Consulting

We can consider a simple formula to describe what we expect from an investment outcome, shown in the figure below.

Figure 2: A simple formula to describe an investing outcome

Source: Albion Strategic Consulting

Starting with taking on sensible risks, such as owning a diversified portfolio of investments, we expect a market rate of return.

Depending on how different a portfolio is to the broad market, the portfolio return will come in higher or lower than that of the market. This is what is known in the investment industry as ‘alpha.’

To achieve a return above that of the market portfolio (a positive alpha) an investor must own a portfolio of stocks and bonds that returns higher than the corresponding market. This can be done through picking stocks, timing markets – neither of which are expected to deliver reliably positive outcomes – or it can be more reliably achieved by overweighting areas of the market the academic evidence would suggest reward investors for owning them over the long term, such as tilting to value and smaller companies.

Next, the financial cost of accessing the desired solution is taken away from the outcome achieved. Controlling financial costs makes good sense.

Finally, there is also a cost associated with bad investing behaviour, such as falling foul to biases, illusions or acting on inadequate information. Good process and discipline, as well as having a good financial adviser for additional support, can ensure such a cost is eliminated.

Investing using a well thought-out, evidence-based and systematic investment process helps to reduce the emotional pressures involved and deliver investors with the highest probability of a successful investment outcome. It does not guarantee that the outcome will always be favourable; it cannot, given the uncertainty of the markets. What it does do is to help us make strong, rational decisions and to avoid the silly mistakes that prove to be so costly, so often. In particular, chasing markets and managers in search of market-beating returns and being sucked into the latest investment fad by recent trends, plausible marketing stories and press coverage. Bad process, or a lack of process, has an upside outcome that is down to luck rather than judgement.

Wise words to leave you with:

Perhaps reflect a while on these wise words written by Charles D. Ellis on his excellent book ‘Winning the Loser’s Game’ (Ellis, 2002):

“The hardest work in investing is not intellectual, it’s emotional. Being rational in an emotional environment is not easy. The hardest work is not figuring out the optimal investment policy; it’s sustaining a long-term focus at market highs or market lows and staying committed to a sound investment policy. Holding on to sound investment policy at market highs and market lows is notoriously hard and important work, particularly when Mr. Market always tries to trick you into making changes.”

Simple but not easy. A systematic process and a guiding hand from your adviser are the keys to success.

Risk Warnings

This article is distributed for educational purposes only and should not be considered investment advice or an offer of any security for sale. This article contains the opinions of the author but not necessarily the Firm and does not represent a recommendation of any particularly security, strategy, or investment product. Reference to specific products is made only to help make educational points and does not constitute any form or recommendation or advice. Information contained herein has been obtained from sources believed to be reliable but is not guaranteed.

Past performance is not indicative of future results and no representation is made that the stated results will be replicated.

One of the great challenges that all investors face is that there is no easy or quick way to investment success. Aesop’s fable of the tortoise and the hare is a useful metaphor. You have to use the time on your side – which could be over multiple decades – to capture the returns of the markets effectively, but often slowly. In the short-term, market returns can be disappointing. The longer you can hold for, the more likely the returns you receive will be at worst survivable, and hopefully far more palatable. It is time that allows small returns to compound into large differences in outcome for the patient investor. The reality is that markets go up and down with regular monotony.

The stock market is a device for transferring money from the impatient to the patient. – Warren Buffett

If you want to be a good investor, you have to be patient. On your investing journey, you will spend a lot of time going backwards, recovering from the set back and then surging forward again, often in short, sharp bursts of upward market movement. You just have to stick with it. Remember that you have to be in the markets to capture their returns. Impatient investors tend to lose faith in their investments too quickly, often with painful consequences.

There are no certainties in investing, but investors can give themselves the best chance of achieving their expectations by allowing the passage of time to let short term uncertainty be overwhelmed by long term expected outcomes.

In the short run, the market is a voting machine but in the long run, it is a weighing machine. – Benjamin Graham

The figure below is a powerful graphic demonstrating the benefit of convergence towards stock market expectations enjoyed by investors who befriend time.

Figure 1: Converging Stock Market Outcomes as Holding Period Increases, Jul-1926 to Jul-2024

Source: Albion Strategic Consulting. Periods on an annualised, monthly rolling basis. Omits ‘Best Return’ outcomes for 1 year to May-33 and Jun-33 due to axis limitation. See endnote for details on data used. 

Risk Warnings

This article is distributed for educational purposes only and should not be considered investment advice or an offer of any security for sale. This article contains the opinions of the author but not necessarily the Firm and does not represent a recommendation of any particular security, strategy, or investment product. Reference to specific products is made only to help make educational points and does not constitute any form or recommendation or advice. Information contained herein has been obtained from sources believed to be reliable but is not guaranteed.

Past performance is not indicative of future results and no representation is made that the stated results will be replicated. 

Data Used:

Albion World Stock Market Index: Jul-26 to Dec-74 – Fama/French Total US Market Research Index. Jan-75 to Jun-89 – 40% Fama/French International market Index, 60% Fama/French Total US Market Research Index. Jul-89 to Jun-08 – 5% Fama/French Emerging Markets Index, 65% Fama/French International market Index, 30% Fama/French Total US Market Research Index. Jul-08 to present – Vanguard Total World Stock Index I VTWIX. Data in nominal terms and presented in USD.

Most investors would probably like to forget the poor performance of both bonds and equities in 2022 and early 2023.  For many investors it was their first real experience of bonds falling in value, particularly at the same time as equities.  Different investors would have experienced different outcomes in 2022 (and subsequently) depending on the type of bonds that they held. It is worth revisiting what has happened since then.

Going back to first principles, we can remind ourselves of several characteristics that apply to bonds: bond prices move in the opposite direction to bond yields i.e. when bond yields rise, bond prices fall; the prices of bonds with maturities further into the future are more sensitive to changes in yields than shorter-maturity bonds, making their prices more volatile; the lower the quality of the borrower issuing the bonds, the more like equities they behave; and finally, bond markets do not like inflation, generally driving up yields in the face of rising inflation.

In 2022, with the growing threat of high inflation following Russia’s invasion of Ukraine, exacerbated by the instability of the unfunded tax promises of the Conservative government under Liz Truss, bond yields rose dramatically and substantially.  The bond see-saw moved violently, with those owning longer-dated bonds suffering material and painful falls in value.  Those who owned shorter-dated bonds fared better, but even so delivered falls in value. Yet, bond owners from that point on began to benefit from the higher yields that their bonds now delivered, recouping some of those falls in value.  Take a look at the chart below which shows how far bonds fell for different maturities and what the return has been in cumulative terms since the start of the fall. As one can see, a big bond bounce-back for shorter-dated bonds has occurred, back to where they started, while longer-dated bonds still sit deeply underwater.

Figure 1: Bond falls and recoveries vary depending on what you own.

Source: Morningstar Direct © All rights reserved – see endnote for details. 

It is evident that shorter-dated bonds have recovered far more quickly than longer-dated bonds as the prices of the former fell less far, and the consequent higher yields have helped to recoup these falls, at least in nominal, pre-inflation terms.  At their worst, shorter-dated global bonds were down around -7% in 2022. However, they delivered just over +5% in 2023, and around +1% to the end of June this year following small yield rises across major markets.

We have always tended to favour shorter-dated bonds for this reason believing that the small premium available in lending for longer is outweighed by the downside protection that comes from owning shorter-dated bonds alongside their bounce-back-ability!

Risk Warnings:

This article is distributed for educational purposes only and should not be considered investment advice or an offer of any security for sale. This article contains the opinions of the author but not necessarily the Firm and does not represent a recommendation of any particular security, strategy, or investment product.  Reference to specific products is made only to help make educational points and does not constitute any form or recommendation or advice. Information contained herein has been obtained from sources believed to be reliable but is not guaranteed.

Past performance is not indicative of future results and no representation is made that the stated results will be replicated.

Use of Morningstar Direct © data

© Morningstar 2024. All rights reserved. The information contained herein: (1) is proprietary to Morningstar and/or its content providers; (2) may not be copied, adapted or distributed; and (3) is not warranted to be accurate, complete or timely. Neither Morningstar nor its content providers are responsible for any damages or losses arising from any use of this information, except where such damages or losses cannot be limited or excluded by law in your jurisdiction. Past financial performance is no guarantee of future results.

Data Series Used:

It feels like 2024 is the year of the election with over 64 happening in various countries around the world covering around 50% of the world’s population[1]!  These range from the farcical pretense of the re-election of Putin, to that in the UK.  At this time, it looks like a probable victory for the Labour party over the incumbent Conservatives, seemingly with a large majority.  In the previous election in 2019, British politics was polarised between Boris Johnson’s ‘getting Brexit done’ mantra and a very left-wing alternative of Jeremy Corbyn and his ‘magic money tree’. Today, the two main parties are vying for far more central ground that tends to win elections. Who said democracy does not work?

In India, the world’s largest democracy, the people have spoken and have put a dent in the BJP and Modi’s ambitions of an overwhelming 400 seats.  They gained just 240 instead, without a majority.  The EU Parliament elections are due to begin, with concerns over the growing impact of the far-right.  Throw in the US election chaos in November and investors might wonder how to process all of this in terms of what might happen to their portfolio.

Well, the good news is that the markets have done this already for you!  It is no doubt, for example, pricing in the probability of a Labour government and what it thinks about its policies, as far as they are known. That is what markets do.  They incorporate all public information into prices quickly and efficiently, meaning that prices only move on the release of new information, which is random.  The stock market tends to be pretty resilient for those with the patience to sit out any passing market storms.  It seems to be obligatory at these times to roll out a chart with the colours of the different parties indicating the periods they are in power – say in red for Labour and blue for Conservative – and showing the growth of the market.  It does not tell you much, apart from these events have little impact, as the market prices in events well before they happen.  So here it is.

Figure 1: The UK market’s growth of wealth over time, irrespective of who is in power.

Source: Albion Strategic Consulting. Data: CT FTSE All-Share Tracker 1 Inc (GB0008464199) from 01/10/1988, Vanguard FTSE UK All Shr Idx Unit Tr£Acc (GB00B3X7QG63) from 01/01/2010. Not a recommendation. Data in GBP in nominal terms. Election results data from House of Commons Library.

It really is pointless to try to predict an outcome any different to that already reflected in today’s market prices.  What is your thesis? How have you interpreted the information that you have to hand? How is your view different to everyone else who is thinking similar thoughts?  The reality is that is really hard to outguess the market view reflected in prices.

As you see from the figure above, these periods of political power are plotted against the UK market. But what does that tell you? Over 80% of the earnings of the UK market come from overseas, so how meaningful is it to just look at UK politics. Not only that, but the UK is likely to represent only a fraction of your global portfolio, as it only represents around 4% of total world market capitalisation.  So, you will need to factor in all 64 elections, all other world events known and as yet unknown and decide how to position your portfolio accordingly.

Alternatively, you could be patient, trust that the markets work pretty well and reflects the aggregate view of all investors and believe in the power of capitalism to deliver rewards due to you as the part owner of companies (equities) and as a lender (bonds).  We advise the latter approach.

The most important thing you can do is to vote.

Risk Warnings:

This article is distributed for educational purposes only and should not be considered investment advice or an offer of any security for sale. This article contains the opinions of the author but not necessarily the Firm and does not represent a recommendation of any particular security, strategy, or investment product.  Reference to specific products is made only to help make educational points and does not constitute any form or recommendation or advice. Information contained herein has been obtained from sources believed to be reliable but is not guaranteed.

Past performance is not indicative of future results and no representation is made that the stated results will be replicated.

[1] TIME (2023) The Ultimate Election Year: All the Elections Around the World in 2024. https://time.com/