By Steve Brice
(Steve Brice is Chief Investment Officer at Standard Chartered’s Wealth Management unit)
When I joined Standard Chartered 24 years ago, I was introduced to the world’s best trader. His name is Harry Hindsight. He always got market timing right. He would always buy at the low and sell at the high. Not surprisingly, his returns were as fantastic as they were mythical. His only problem was: he could only ‘predict’ outcomes after they had occurred. In the real world, we make decisions before we know the outcomes. This means we have to factor in uncertainty which totally changes how we should act and plan and is different from the ideal scenario.
In a world of significant uncertainty and complexity, there are always reasons not to invest. Unfortunately, we are naturally predisposed to attach a higher weight to negative information/views when trying to predict the future - and there are plenty of people letting us know why investing today is a bad idea. Another bias is that we tend to seek a simple explanation of why things happened historically and then use that narrative, often inaccurately or at least incompletely, to boldly forecast the future.
Let’s take an example. What if I told you that, over the next two years, the world would face an unprecedented pandemic and in two years’ time there would be a new variant of the virus spreading quickly, with over one million US cases in a single day. Would you believe that equity markets will rally 30% in that environment?
As you would have probably guessed, I am benefiting from Harry’s expertise here as this is exactly what happened over the past 2 years.
Of course, I was not predicting a global pandemic at the end of 2019. Even worse, my frame of reference (at least initially) for COVID-19 was SARS, having lived in Singapore during that outbreak. Therefore, I argued China would be able to get COVID under control quickly (the right answer to the wrong question) and it took me longer than Harry to figure out how challenging this environment would be.
Thankfully, as an investor, two things stood me in good stead – my optimistic slant and my investment approach.
If I had had perfect foresight regarding the pandemic, I would probably have struggled to stay bullish on equities. But my optimistic outlook, supported by very powerful fiscal and monetary policy responses around the world, boosted the performance of my portfolio as I remained invested throughout.
In terms of my investment plan, I am very comfortable adding to investments during periods of weakness and very rarely sell into market strength. This lop-sided approach is based on three fundamental beliefs:
1) Equities tend to rise over the long run
2) Equities are approximately twice as likely to outperform bonds over any 12-month period
3) Market sell-offs are incredibly difficult to time
I think most people would broadly agree with the first two, so let’s explore the more contentious third belief. Here I will share two perspectives.
First, there are many indicators analysts use to signal potential weakness in equity markets, including volume of equity purchases financed on margin, an inverted yield curve, and stock market capitalisation as a percentage of GDP. However, we have yet to find any indicator, or combination thereof, that is reliable enough to turn my second belief on its head over a 12-month time horizon or longer.
Second, people often forget that not only do you have to get the timing of the peak right, but you also have to time the re-purchase correctly. Let’s take the pandemic experience as an example. You would have been much better off sitting on your hands throughout the roller coaster ride in March-April 2020 compared with if you had sold global equities a month after their peak and then repurchased a month after the trough – in this case, you would have repurchased stocks 10% above your selling price.
Of course, the real outcome is often much worse. I still speak to far too many would-be investors who are massively under-invested in equities as they sold during the pandemic, missed the initially rally and have been perpetually waiting for better entry levels.
So what should these investors do today? I have three pieces of advice. First, determine what your investment allocation should be in the coming 2-3 years. Second, start small, but start investing with that target state in mind. Drip-feed savings into investments on a regular basis and then if bonds or equities sell off, you can accelerate the purchases, while trying to block out the doomsayers that are likely to be detrimental to long-term portfolio performance. Third, stay diversified. Try not to focus on very niche areas of the market to start with - adding to these type of investments can come later when you have already built a foundation allocation, but it should not be the starting point. Effectively, admit to yourself and your loved ones that, unfortunately, your name is not Harry Hindsight.