20 per cent VAT 2012 budget 50% return accountancy accountancy fees accountancy services accountant accountant B accountants accounting for dividends accounting records accounting software accounts accounts software administration annuity annuity rates Autumn statement avoid inheritance tax avoidance of tax avoiding inheritance tax bank lending basic personal allowance BCC big picture book keeping Bribery Act British Chamber of Commerce BS7858 budget budget 2011 Budget 2012 budgeting business business accounts online business advice business cash management business confidence business continuity business continuity management business continuity plans business cost management business efficiency business exit business exit planning business finance business friendly business funding business goals business growth business investment business loan business management business owners business performance business plan business planning business record keeping business records business sale business success business succession planning business survival business tax planning business tips bwe based account cash flow Cash flow forecast cash is king cash management Cash-based accounting cashflow chancellor chartered accountant chartered accountant Birmingham chartered accountants chartered financial planner chartered financial planner Birmin child savings children’s savings choosing an accountant client entertaining Cloud accounting Company Tax returns compliance industry contractors IR35 corporartion tax Corporation tax credit control credit control procedure cyber attack cyber crime cyber insurance cyber security cyber threats data security data security. IT security debt collection debt recovery despite some of the bad press over recent years director’s loan account directors loan directors pensions Directors’ loan account dividends doubl Dragon’s Den dragons den Economic expansion EIS email security employee data security Enterprise Investment Scheme enterprise zones entrepreneur Entrepreneur’s relief entrepreneurs entrepreneurs relief ethical hacker Everyone needs to finance their retirement and exit planning finance finance management financial advisor financial difficulty financial forecasts financial freedom financial goals Financial management financial plan financial planner financial planning financial planning checklist financial planning tips financial wellbeing FSTE 100 FTSE100 fund manager gifts global markets growth growth finance HMRC HMRC enquiries HMRC enquiry HMRC IR35 guidance HMRC tax enquiries HMRC tax enquiry home loans how to manage time ICAEW IHT income tax income tax r income tax relief income tax return independent financial advisor information security information security management inheritance tax inheritance tax planning insolvency Institute of Chartered Accountants investing Investment investment advice investment diversity investment in marketing investment management investment options investment philosophy investment planning investment portfolio investment risk investment strategies investment volatility investments investors IR35 ISO 27001 ISO 27001 benchmark ISO 27001 consultants ISO22301 ISO27001 IT security Jimmy Carr jobs keeping the books key perfirmance indicators key performance indicators KPIs kpi's late payment penalties late payment penalty fines late payments legal tax strategy management information management meetings management standards managing data security marketing investment miscalculated tax motivating staff national lottery new years resolution online accountancy online accountancy software online accounting on-line accounting online accounting software online accounts online tax return online VAT return outsourced accountancy outsourcing outsourcing accounts overtrading owner managers Parker Management Consultants partnership agreements passwords Pay off mortgage PAYE paying a dividend Payroll penetration testing pension pension contribution pension contributions pension fund Pension funds pension investment pension investment strategy pension scheme pensions pensions forecast per personal allowance trap Personal financial plan personal financial planning personal guarantees personal pension personal pensions personal tax return plumbers tax safe plan pre pack administration private pension profitable business sale R & D tax credits R&D tax credits recession red tape reduce tax remote working report on economy research and development tax credits retirement retirement planning risk risk return safest passwords Saga sareholder protection cover security of websites Seed Enterprise Investment Scheme SEIS selecting an accountant Self assessment self assessment tax return self invested personal pension selling my business selling your company shareholder agreements shareholder protection SIPP SIPPS small business small business owners small business tax small businesses small firms SME SME business management SME marketing SME tax planning SMEs social media policy SSAS start up start-up stock market succession planning tax accountant tax affairs tax avoidance tax breaks tax charges tax code tax disclosure tax enquiries tax enquiry tax evasion tax investigation tax investigations tax liability tax man tax mitigation strategies Tax planning tax planning advice tax planning schemes tax reduction tax reform tax relief Tax return tax saving tax saving strategies tax savings tax strategies Tax tribunals taxation tax-break time management time management skills top rate of tax tough times UK Bribery Act UK economy VAT increase vat return VAT rise VAT submission web based acc website security when to pay a dividend work-life balance Xero Xero accountancy software Xero accountants xero accounting xero accounts Xero accounts service

So much volatility, what is an investor to do?

Add to: Digg Add to: Del.icio.us Add to: Facebook Add to: Furl Add to: Google Add to: Live Spaces Add to: MySpace Add to: StumbleUpon Add to: Twitter
Thursday August 25, 2011 at 9:00am

Although a daily report on the position of the FT100 index of UK shares is totally irrelevant to the long term investor, the media insist on relaying it in almost every news report at the moment.

Steve Forbes, publisher of US Forbes Magazine, makes an interesting point; “You make more money selling advice than following it. It’s one of the things we count on in the magazine business – along with the short memory of our readers.”

There is no doubt that big movements in stock markets (volatility) make investors nervous. At times like this it is as well to return to first principles so I thought it would be useful to look at what the present lurches in world markets mean in a rational way.

Markets work: There is a huge body of academic research that tells us that markets reflect all available information. Also it is not possible to consistently prosper by trying to outguess the market. The only factors moving markets are unanticipated future events. The current volatility is because future events have become more uncertain and hence more difficult to price by markets.

However once news is in the public domain it will already be factored into stock market prices. This means that no matter how well informed you are the market will already have beaten you to the news. This is why it is impossible to consistently make financial gain by trying to time or second guess the market. Having an investment strategy and sticking to it is the only way to consistently achieve the return the market owes investors for taking on risk.

Risk and return are related: that is we demand a higher return from investment in equity as we are exposed to a higher degree of financial risk. Clearly that return does not come in a straight line with a little more return each day and each week.

I’ve commented before on risk and return in An investment philosophy that will let you sleep at night. In reality the only way to look at return from an investment portfolio is to look over a longer period of time. Not 1 week or 1 month or even 1 year. It is much more sensible to look at returns over 3 years, 5 years and 10 years. For example our 100% low cost equity portfolio returned -22% in year to April 2008, +43% to April 2009 and +10% in year to April 2011. Over those three years this equated to an annualised return of 7.13% per annum. (Not dissimilar to the 10 year annualised return from the same portfolio). However if you had invested in 2008 and then sold you would have crystallised on a real loss and missed out on future gains.

Diversification is key. The vast majority of people do not hold 100% equity and hold at least some fixed interest. As equity values have fallen fixed interest prices have risen thus going some way to counteract the drops in equity values.

Another important point about diversification is to understand how it is defined. Holding a variety of asset classes is important (such as equity, fixed interest, property, and cash). However it is also important to ensure that the equity you hold is properly diversified. For example UK stock markets compose around 7% of global equity markets by market capitalisation. Hence holding only UK quoted stocks is not very diversified based on this definition. Unlike our globally diversified equity portfolio discussed above making 7% per annum over the last 10 years, the FT100 has actually made a negative return over the same period. The reason being one portfolio is fully diversified, the other is not.

For more in diversification read Investment diversity today is all about the global economy.

Behaviour biases or emotion can overwhelm reason. The same part of the brain processes the effects of financial losses as processes our response to mortal danger. This can lead us to avoid financial risks once we have suffered a loss. It can also make us take additional risk once risk has occurred. Neither behaviours are rational but it can help explain why many investors will sell out of investments when prices fall, that is perversely when equities become cheaper. The same investors will most likely buy when everyone else is buying, that is when equities become more expensive. Don’t forget that for every investor selling there has to be another investor buying.

So what is an investor to do? Nick Murray (a highly respected American commentator) said “At the end of our investing lifetime it won’t matter what your funds did, it’ll matter what you did. And what you did will be a pure function of the quality of advice you got – from one caring competent advisor, and not from any number of newspapers and magazines”.

And so on that note my advice is to hold a properly diversified portfolio of investments, reduce expenses, minimise taxes and maintain a strong buy and hold discipline. Work with an advisor who will make you aware of the real investor biases and don’t allow them to cloud your judgement.

Andy Parker BSc FCA APFS Chartered Accountant Chartered Financial Planner.

Comments on this post:

There aren't any comments for this post yet. Why not be the first to comment?

Share your experiences:

Your Name  
(to appear with your comment)
Email Address  
(will not be published)
Comments:  
Human Validation Check  
In the box below, please type the characters that you see in the picture. This helps us to ensure a real person (and not a crafty computer!) is submitting this form.

Enter the code shown to the left:

Parker Chartered Accountants and Financial Advisors is the trading name for Parker Business Development Ltd (Registered No. 4116664), Parker Tax and Trust Ltd (Registered No. 06950353) and Parker Financial Planning LLP (Registered No. OC347027). Parker Financial Planning LLP is authorised and regulated by the Financial Conduct Authority. All companies are registered in England and Wales – registered office contact details here