If you’re new to investing then it can seem very complex and overwhelming. How exactly do you invest? What do you invest in and how can you protect your capital as it grows? In this article, our Oxford-based financial planning team here at WMM offers this short guide on investing for beginners. If you have any questions or wish to discuss starting your own portfolio, then please get in touch and we’d be happy to help you.
It’s no secret that 2020 has been a volatile year for the UK stock market – and, consequently, many pension funds which are invested heavily in them. On January 17 2020, the FTSE 100 stood at 7,674 before falling sharply to around 4,993 by 23 March as the reality of the pandemic set into the markets.
With the end of the first quarter (Q1) of 2020 now behind us, a clearer picture is starting to emerge of how COVID-19 and the subsequent global lockdown has affected the stock markets and those invested in it. Here at WMM, our Oxford financial advice and planning team wanted to offer this short update in light of the latest data, with specific focus on the FTSE 100.
If you didn’t know better you may assume, probably because of constant media noise, that Stock markets globally have virtually ceased trading, and just given up. Actually, they haven’t and many of our clients have seen really good market recoveries lately. That clients have listened to and accepted the logic behind our investment philosophy is extremely reassuring to us. It has meant sitting tight, taking advantage of recent downturns, knowing that ‘this too shall pass’.
We are acutely aware that many investors will not have experienced the levels of recent volatility, however, I personally have been through around 7 of these ‘Black Swan’ events so feel confident we know what works to get people and families through the times. It really resonated with me when new National Treasure, Colonel Tom Moore said: “For all those people who are finding it difficult at the moment: the sun will shine on you again and the clouds will go away,”. Captain Tom may not know all the academic research behind key investment principles, like the one below about letting Markets work for you, but I couldn’t have put it better myself. He’s been around you know!
In investing, there are two main sources of potential returns. The first is the return that comes from the markets and the second is the return generated through an investor’s skill. At its simplest, there are two main ways in which an investor can try to deliver a better return than the market return; time when to be in or out of the markets (known as market timing, tactical asset allocation or sometimes a ‘top-down’ approach), or to pick individual stocks (known as stock picking, security selection or sometimes as a ‘bottom-up’ approach). This gives us the four main combinations of strategies set out in the figure below.
Figure 1: Four main strategies exist – they are not equal in effectiveness
Trying to beat the market – through either market timing or stock picking – is a tough game, with very few winners, and in our view is not a game worth playing. That positions our own approach in the bottom right quadrant, where we and other sophisticated investors use the information in the empirical evidence to employ an approach with the greatest chance of delivering a successful outcome. We avoid trying to market time or pick stocks. We just let the markets do the heavy lifting.
Letting the markets do the heavy lifting on returns will take a great weight off your shoulders; you no longer need to worry about picking the right stock, the right manager or deciding if you should be in or out of the markets. We are always happy to chat about some of the overwhelming empirical evidence in support of our approach, so if you feel you want to know more then call us on 01869 331469.
As we write this, the global markets are still in a period of great uncertainty. Even as European nations tentatively begin reopening their schools and business, COVID-19 still hangs over the economy and stock exchanges. Many investors, already bruised from 30% market falls in the first quarter of 2020, are looking ahead with trepidation, wondering if things will get better. If they do not, moreover, how can an investor muster the mental fortitude to stay true to the investment strategy they agreed with their financial adviser?
It’s often hard enough to stay true to the investment strategy agreed with your financial adviser during “good times” in the market. When the economy is unstable and markets are fluctuating, however, holding course is usually even more difficult. The temptation to withdraw from falling stocks, jump onto rising ones or redistribute your asset allocation can be very strong – especially if following the media or if you believe others around you are doing so.
A diversified portfolio (set of investments) spreads your money across different asset types and investment opportunities. There are many benefits to doing this, as opposed to concentrating your money on a small group of investments. Here at WMM in Oxford, we point clients to the fact that this approach helps to reduce your investment risk; after all, if one investment performs badly but the others don’t also suffer, then your portfolio is shielded from further damage during times of market volatility.
Here at WMM in Oxfordshire, our financial planning team has received many enquiries about the prospects for the stockmarket in 2020. Almost certainly, these concerns have been driven by alarmist headlines about global recession from the UN, or worldwide debt crisis from the World Bank. These fears will have been stoked more recently by the outbreak of the COV19 virus which threatens to push countries such as Singapore into recession, and which could cost the global economy as much as £217bn in the first quarter of 2020.
If you’ve ever watched Dragon’s Den, you’ll have noticed that Peter Jones, Touker Suleyman and the other investors look to invest in multiple companies. Each show might focus on a handful of investment opportunities, but looking at each of the Dragon’s investment portfolios as a whole, each one would feature multiple companies and asset types.
Whether you have been investing for a while or are just starting out, the fluctuations of the stock market can be a frightening thing. Cash can be comforting in comparison; its value is somewhat predictable. Yet in today’s world of low-interest rates, you’d be lucky if your cash managed to beat inflation. Realistically, to generate any meaningful investment returns in 2020 you need to look beyond cash to other asset types, which inevitably carry greater risk.
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