After a week that has seen escalating violence in the Middle East, concerns about the Indian variant derailing the roadmap, Liverpool’s goalkeeper score a goal (at the right end) for the first time in their 129-year history, Debenham’s stores shut their doors for a final time, whilst pubs and airports finally get to open theirs, markets shook off inflationary concerns and held firm.
A pickup in US inflation has been well telegraphed, but April’s 4.2% year on year increase in the US Consumer Price Index was still striking. The dramatic rise is primarily a reflection of how far prices fell last year, with a strong rebound always likely. That said, we see several factors worth monitoring. Manufacturers have been facing supply bottlenecks causing their input costs to rise, some of which are typically passed onto customers. Consumer spending in the US has surged, after roughly $340 billion in stimulus cheques were handed out in March. Businesses are also reporting that it is hard to hire, creating upward pressure on wages. While policymakers appear confident that many of these factors will prove temporary, markets will be very sensitive to any signs of a change in this stance. As investors we remain vigilant for signs of more persistent price pressures as a result.
This week there was continued strong domestic economic data with UK House prices rising 1.4% in April, according to the Halifax Price Index, taking the annual increase to a five-year high of 8.2%. In addition, the National Institute of Economic Research revised its forecast for this year’s UK Gross Domestic Product growth (GDP) from 3.4%, made in February, to 5.7%.
Official GDP data shows the UK economy shrank by 1.5% in the first quarter of the year, leaving it 8.7% smaller than pre-pandemic numbers. However, data for March was better than expected, showing an increase of 2.1%.
In the US, a cyber-attack put their largest fuel pipeline network out of action for five days, causing supplies to tighten and prices to rise. The hacker group DarkSide reportedly demanded and were paid 75 Bitcoins (roughly $5m) to unlock the hack. The pipeline they targeted carries 2.5 million barrels a day, roughly 45% of the East Coast’s supply of diesel, petrol and jet fuel.
The US Consumer Price Index (CPI) rose 4.2% year-on-year in April, up from 2.6% in March, and above expectations of 3.6%. Used cars and trucks prices made up a substantial proportion of the increase, rising by 10%, the largest one-month increase since the CPI began in 1953. Alongside this US retail sales rose by over 51% in April compared to a year prior.
As is becoming a running theme the difficulty in translating these historically significant numbers and noisy headlines into meaningful trends, is that they are all comparing a snapshot of a more or less current and extremely fluid market situation to that of a year ago, when we were in the depths of the first lockdown.
Just a quick reminder that the latest version of our Limitless magazine is available here, with a number of topical financial planning articles including:
– Will your pension run out early? – Impact on people opting for early retirement as a result of the pandemic .
– Sustainability matters – Plan for a better tomorrow, today
– Funding your child’s future lifestyle – early preparation in life is key to becoming financially independent.
This week we bring you:
– Our latest True or False Quiz
– How to win by not losing
True or False Quiz
As usual which of the following statements are true and which are false? Answers and context at the bottom of this update.
- Liam and Olivia are the most popular baby names in the United States.
- Despite a series of investigations and scandals labelled as the “return of Tory sleaze”, this month more people approve of the governments record in office than disapprove of it, for the first time since May 2020.
- China has more than 10 times as great a distance of high-speed rail track than Japan, the country with the second largest high-speed network.
- Not only does China have the longest high-speed rail network, but it also has the quickest trains on any nations network.
- Americans managed to clock up a total of 5.2 trillion passenger miles (miles travelled multiplied by number of people in the vehicle) on their roads in 2019, compared to 754 billion by air, 380 billion by bus and just 39 billion by rail.
- According to the Un Statistics Division, China now accounts for 28.7% of all global manufacturing output – more than 10% ahead of the US.
- This week’s bonus point (not true or false question) – The American president Joe Biden’s policies have been described as “autarkic” and “revanchist” – but what does that mean?
How to win by not losing
The acceleration of the pandemic, and more recently, the flood of day traders into stocks such as GameStop, have reiterated the potential impact of volatility and rash decisions on individual’s wealth. None of us can control the markets, other participants, or volatility itself, but what we can manage is our own behaviour. There are certain things we can do and, more importantly avoid, as we look to ‘win’ over the long term, and a vital part of this lies in not losing, much like a golfer should concentrate on avoiding unforced errors. As Scottish-American golfer Tommy Armour said: ‘It is not solely the capacity to make great shots that makes champions, but the essential quality of making few bad shots.’
Four ways to avoid investment mistakes are: to concentrate on your defences, to keep it simple, to play your own game and to not take it personally; all of these are applicable to the key tenets of our investment process.
Looking at concentrating on your defences first: A central part of winning by not losing is focusing on the potential downside of any investment decision, before considering the upside. Some basic numbers make this point very clearly, with rapidly rising percentage gains required to make back higher losses. Losing 10% of an investment’s value only requires an 11% gain to make up the shortfall, but this number climbs rapidly to a 67% return needed to make good a 40% decline and 100% to get back to par after a 50% drop. For us, this focus on downside protection is critical to meeting long term desired client outcomes and we tend to favour underlying investment managers, with a similar mindset to us in this respect. It is also why we will always ensure a sensible cash reserve is considered, or a 5 year plus timeframe used so investments do not need to be encashed in times of market weakness.
Moving on to keep it simple: This is about following an established investment process and understanding what ultimately drives performance: long-term data show 80% of the variability of portfolio returns come from asset allocation. This is why we spend a long time focusing on the correct level of underlying risk and we like investment managers that have an actively reviewed strategic long-term asset allocation model when selecting portfolios that are suitable for each individual client.
Another part of keeping it simple is avoiding those unforced errors that tend to come when investors try to time the market, which decades of data show even the most experienced professionals cannot do with consistency. Any book on behavioural finance will go into detail on what lies behind these common investing mistakes but, ultimately, they all manifest in certain ways, either trading too much or too little, or taking too much risk or not enough.
This leads on to playing your own game: In an investment context, this is about focusing on your long-term plan and ignoring short-term noise as far as possible. This encompasses several lessons which also centre on patient investing with an ultimate goal in mind. Key to this, we suggest, is remembering that equities tend to drive returns over the long term. However, diversification across other assets is integral to long-term robust returns and the temptations to exclude or remove short-term underperforming assets must be tempered. While consistency of performance is impossible across all timeframes, consistency of process is vital.
The ongoing active versus passive debate is a good example of the kind of noise that ultimately does little to help long-term wealth generation. Our approach is that both can play a role in portfolios, but selecting active managers is the way to produce higher returns over the long term. For patient investors, there is enough dispersion in returns to identify manager skill, as opposed to luck, and select those who can outperform long term.
A final way to win is don’t take it personally: Once again, this is about avoiding unforced errors and not giving way to the forces of fear and greed that influence so many investment decisions and lose people their hard-earned money. We have seen in recent years the potentially damaging impact of the FOMO (fear of missing out) with various high profile speculative investment flops. It is amazing how often hope and euphoria can turn into denial and panic, or fear becomes greed and vice versa.
A few numbers show the potentially devasting impact of poorly timed decisions and reacting to short-term noise: missing the best 50 days in markets over the 11 years from March 2009 to February 2020 would reduce the return of £100,000 invested in an average Cautious Managed fund from £218,700 to just under £130,000 – which equates to 75% lower returns.
We pursue noise-cancelling investment as far as possible: staying the course in a well-diversified portfolio and ignoring market fluctuations. Over rolling three-month periods in the last 25 years, the FTSE 100 has been down 30% of the time and up 70% of the time; if you extend that period to rolling 10-years, the ratio shifts to 98% of the time being positive periods. Making decisions based on short-term data rarely produces good results.
Winning by not losing may be less spectacular, whether in investment or golf, but it reduces the emotional rollercoaster experience and helps to avoid those unforced errors that can be so damaging in both pursuits. For us, successful long-term investing needs to focus on achieving risk-adjusted returns and meeting your needs, rather than beating peers or markets. In this context, patience, discipline, and consistency of process pay off.
True of False Quiz Answers
- True – Liam has now been the most popular boys name for 4 years taking over from Noah, while Olivia has ranked at the top for girls for 2 years, relegating Emma to second place after a 5-year spell at the top – https://www.ssa.gov/oact/babynames/
- True – Peak popularity coincided with lockdown #1 where 52% of the population approved of the government’s record in power, this slipped to less than 30% at the start of November and has now steadily risen to 40% just above the 39% who disapprove. The remaining 21% gave no firm answer either way.
- True & False – China has a network of 35,388km of high-speed track. Second place on the list is Spain with 3,330km, Japan is third with 3,041km. The US sits between South Korea and Turkey on the list with 735km of high-speed track. The UK is nowhere to be seen even with HS2 probably coming at some point.
- True ish – The Chinese loco’s have the highest maximum operating speed of 349km/h (216mph), quicker than the French TGV or the Japanese ‘bullet train’ Shinkansen (both 320km/h). However, the TGV holds the record for the highest speed ever reached, a min-blowing 575km/h (357mph)!
- True – miles travelled by each mode of transport has increased steadily over time, but rail travel has stagnated over the past few decades. Joe Biden a former famed user of the Delaware to Washington Amtrak rail service has pledged $80 billion of his recent stimulus packages to Amtrak. Whilst the US Transport secretary calls the increase in US high-speed rail networks a no-brainer, the vast majority of this windfall will be spent repairing and improving existing parts of the network rather than building new high-speed lines.
- True – China only overtook the US in 2010. The UK accounts for a grand total 1.8% of all global manufacturing.
- Bonus Point Question – autarkic : 1 : self-sufficiency, independence specifically : national economic self-sufficiency and independence. – revanchist : 1 : one who advocates or fights for the recovery of lost territory or status : the political manifestation of the will to reverse territorial losses incurred by a country, often following a war or social movement.
Past performance is not a reliable indicator of future results. The value of investments and the income from them is not guaranteed and may go down as well as up and investors may not get back the amount originally invested. For information purposes only. The views expressed are the author’s own and do not constitute investment advice.
As always, please do not hesitate to contact one of our Financial Advisers at our Leamington Spa or Coventry offices if you wish to discuss this in further detail.