Investment strategy
in an era of event risk

Our viewpoint

A good strategy helps long-term investors ignore headlines

Late at night on 8 November 2016 billions of pounds were wiped from stock markets around the world as a risk that had been talked about for months began to materialise and markets reacted in shock to an emerging Donald Trump victory. However, just a few hours later as US markets opened the day after, a turnaround had begun one of the most profitable 3-year periods of recent times with the S&P 500 surging over 40% to new all-time highs.

It has become almost cliché to say this, but as we look back on the decade of the 2010's there was no shortage of potentially worrying, dramatic events that grabbed headlines, and rattled investors’ confidence.

However, looking back, the decade represented one of the best ever for equity investors, with a £-Sterling-based buy and hold investor in a FTSE World index tracker or similar having earnt total returns around 200% over the decade. Selling out of equities in the face of one of these many crises might have seemed a reasonable thing to do at any of these points in response to the risks, but it would have also come at a significant cost in terms of returns. This isn’t just hindsight talking, for investors pursuing a long-term, growth-oriented investment strategy a good deal of evidence supports staying invested over time to earn maximum returns.

“How then to exercise due vigilance and be a prudent steward of assets, without drowning in the noise and being triggered into knee-jerk reactions that can be value-destructive?”

There are always reasons to be bearish though, and with today’s 24-hour, social media fuelled news-cycle of shock clips, talking heads and headlines this poses a serious problem for the long-term investor. “If it bleeds, it leads” (i.e bad news attracts more attention than good) has never been truer.

How then to exercise due vigilance and be a prudent steward of assets, without drowning in the noise and being triggered into knee-jerk reactions that can be value-destructive? This is the dilemma faced by many a long-term investor. The answer is simple, but like many important things in life, not at all easy.

Follow a straightforward framework, a process (pictured below), and stick to it. 

Investment strategy framework

That is not to say we should block out all news and new information – that would be a little irresponsible, but we need to set a high bar for changes to our portfolio and evaluate all new information or oncoming event risk in the context of the framework. For example:

  • Does it change my objective?
  • Does it change my expectations for future asset class returns?
  • Does it reveal an unrewarded risk in the portfolio not previously recognised
    or understood?
  • Does it call into question the appropriateness of underlying managers?
  • Does it offer opportunities to allocate into new areas to better meet my objective?

When it comes to stock market levels and bond yields, these get factored into estimates of future return levels when assessing the strategic asset allocation, and whether it remains on track for objectives.

Where particular sectors, markets or countries have suffered from negative news the question to ask is “what has this done to expected future returns?” Perhaps they are lower, so the asset class should be removed from the strategy or perhaps this area now offers an attractive opportunity in terms of long-term expected returns.

So, there you have it. Our advice for investing in a time of event risk might not be the most exciting, but it’s based on what we’ve seen work over decades advising hundreds of clients. The details are important too of course, but when we look back in another 10 years’ time we can be fairly sure that whatever unexpected events have come to pass, the five short steps above will have driven the bulk of investors returns. Simple, but not easy.

Our investment thinking

Our investment thinking

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