Uncertainty seems to be the signature catchphrase of our times – a state often amplified in the world of investing. Countless forces affect the prices and price movements of stocks and bonds: economic factors, company results, trade and political frictions, monetary policy and many, many more.
Faced with these multi-faceted permutations, how do we prepare for what we cannot predict? How does a modern wealth manager anticipate the factors which may affect your investments, and prepare portfolios which are resilient?
A robust approach to investing
When we invest – as we describe in detail here – we take an approach that is based on Modern Portfolio Theory. We use historical data as a starting point for future risk and return behaviour from different assets, then adjust for the current market environment and how that may impact returns in the future.
Because we understand that a degree of uncertainty is baked into any of our assumptions, we frequently stress-test the expected characteristics and relationships between the assets we invest in. This helps us to be prepared if markets become more volatile, for whatever reason.
Our team is concerned about risk – and acts to manage it
Risks are inherent in investing, which is why we pay so much attention to the various ways they can take hold. These can include risks associated with markets, events, specific instruments and liquidity. Each of these is carefully monitored and managed by our Investment Committee, who decide if any action needs to be taken.
Outside of the Investment Committee forum, we vigorously debate the potential effects of any economic, political or social risks and assess how they could potentially affect investments.
However, as the graphic below shows, we expect the extremes of market performance to diminish when viewed over time. So, the longer the time horizon an investor has, the more the effects of immediate risks are reduced. As long as an investor calibrates their investment horizon accurately, the shorter-term market rallies and falls become less important to the end outcome. We can monitor and manage portfolio risks, but we can’t negate market behaviour.
Responding cautiously to uncertainty
Uncertainty sometimes demands action, but it pays not to jump the gun. We are firm believers in staying invested and history shows this is usually the best course of action, as this article examines.
Managing behavioural biases
Because uncertainty can have a strong emotional and cognitive effect, this may affect our ability to think rationally and make the most of our money. We explain some of the more common effects here – such as herd behaviour, loss aversion and status quo bias.
Our investment team has a wealth of experience in handling the biases that investors typically face. They always look to objectively assess the difference that taking an action, or not acting at all, will make.
Despite uncertainty, we remain focused on the long term
Our emotions can cause us to feel overwhelmed by uncertainty. Fears over the economy, and the political and social landscape can often affect both our wellbeing and how we manage our money.
But we believe, and the evidence shows, that it pays to be patient – and that the negative impacts of events or news usually recede over time. We therefore manage investments, and uncertainty, by taking a long-term approach, despite paying close attention to more immediate factors.
Uncertainty won’t vanish any time soon, but we can alleviate its effects by impartially interrogating facts and using the resulting insights to protect the interests of our clients.
Please remember that when investing your capital is at risk.