When world markets display worrying volatility, investors need to feel reassured that their long-term goals are on track. At Netwealth, we give clients the tools to see how short-term performance can be viewed in context with previous events to allow them to make informed decisions about their investments – which for most will result in taking no action at all.
Putting returns into context
It can be difficult to put your portfolio’s returns into context, particularly over the short term. When returns rise 4% or drop 3% over a three-month period, are they to be expected?
To help clients get a better understanding of what is a normal range of returns, or what might be more unusually positive or negative, we show contextualised time weighted returns within our app. Choose any given time period – either from the band of options included or by zooming and moving around the chart – and you can see a series of return bands that show you what the normal range of returns would look like for your risk level and chosen time period.
So if you are invested in a Risk Level 6 portfolio and view your 3-month return you will see that a range as wide as -2.5% to +7.5% would be normal. If your return is outside this range then portfolios are experiencing an unusually strong or weak period of returns.
Unusually strong or weak returns can happen more frequently over the short term. This is because markets often under and overshoot before gradually reverting to a more normal level. So if you select a longer time period, for example 12 months, then you may see returns fall back to within an expected normal range.
Lessons from previous experience
We may feel we are living in extraordinary times, but they are rarely unprecedented. Market shocks and disruptions happen often enough: they can follow economic cycles and also be affected by events such as the tech bubble, 9/11 and Brexit.
While the viruses are structurally similar, the SARS outbreak of November 2002 is different in many ways to the current Covid-19 coronavirus epidemic. In 2002 equity market valuations were inexpensive after a prolonged period of negative returns, while stocks are more richly valued now given how well they have performed over the past 10 years. Also, the new coronavirus has infected many more and China’s share of global GDP is much higher now than it was in 2003 (17% now compared to 4% in 2003).
Our visualisation tools allow our clients to interrogate their positions any time by assessing how well their current portfolio would have performed during previous market episodes. We have now added the SARS scenario to the my accounts section of your account – to serve as a helpful comparator while bearing in mind that the market outcomes will likely be different this time round.
You should also note that these are historic returns and we should not extrapolate them to predict future returns.
Putting short term moves into the context of your longer-term goal
It’s likely that any shorter-term moves won’t materially affect your long-term goals. Therefore, it’s important not to make kneejerk changes to your portfolio’s risk level (but when should you?) as this will likely have a much bigger impact than short-term market gyrations.
As a Netwealth client you should look at the Review and Update section of your My accounts view to see an updated projection of how your portfolio might perform in the future. This will factor in any short-term moves that have occurred and give you some valuable context for you to assess your most important outcome: the ability for you to meet your goals in the long run.
We believe that taking a longer-term attitude and applying a strategic approach to portfolio construction is the best way to protect against the damaging impact of disruptive events.
As we show here, the case against moving in and out of the market, whatever the circumstances, is clear. Our role as a discretionary wealth manager is to navigate client assets through uncertain times as well as when conditions are calmer.
Every investment will probably go through a period when it underperforms. Avoiding any hasty reactions to events (which may do more damage than good) will give you the best chance of meeting your investment goals.
Please remember that when investing your capital is at risk.