Finance

THE REBOUND

Andrew Fort B.A. (Econ.) CFPcm Chartered MCSI APFS, Certified and Chartered Financial Planner, Fort Financial Planning

As I write this article, we are now into our fifth month of living with a pandemic. Initially, global stock markets reacted with understandable panic – prices in the world’s quoted companies fell by around 30% in the period from mid-February to midMarch. To my mind, this was entirely comprehensible as many businesses were prevented from operating and therefore moving from profitability to loss.

Since that period of time, despite the number of infections increasing exponentially worldwide and millions of people dying, stock markets around the world have increased in value by a similar percentage. While not at as high a level as seen in February, markets have certainly returned. To most of us this seems totally illogical as very little appears to have changed – investment conditions are still very uncertain and no end to the pandemic is in sight.

I would suggest that this rebound confirms that, in the short term, markets are not at all predictable.

Most professional money managers believe that they are able to foresee the future. The majority are highly educated; a first-class honours degree being a common characteristic. They believe that they can outwit their peers and obtain better than average returns. Manifestly, this cannot be true – professional money managers perform the vast majority of trading throughout the world. By definition, their performance as a whole represents the average. That means that while some may be better than average, a similar number will not be. After allowing for fees to be factored in, statistics tell us that very few fund managers are able to deliver returns better than the market. There have been exceptions. A UK fund manager, Neil Woodford, was able to produce market-beating returns for many years. Recently, it would appear, his luck ran out and he went from star manager status to ‘has-been’. Sadly, for his investors, their returns disappeared.

The level of risk that is taken is generally what determines the likely rewards. After all, risk and return must surely be related; otherwise no sane person would take extra risk if there was not at least a prospect of better returns. Higher risk can be managed in many different ways, perhaps the simplest being diversification. Diversify to the greatest possible extent, not just within the UK but also worldwide. Don’t just hold the shares of smaller companies but hold larger and value shares as well. Don’t over allocate to China, for example, as there are other emerging economies as well.

Perhaps most importantly, be clear about your time frame. Avoid the stock market with money that you might need to access in the foreseeable future. Despite the considerable uncertainty throughout the world’s stock markets at the moment, it is likely that most will be higher – and delivering a better return than cash – in five years’ time. In the meantime, prepare for a rollercoaster of a ride.

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