Fisher Investments UK

Note: Fisher Investments UK’s political commentary is intentionally nonpartisan. We favour no political party nor any politician and assess political developments solely for their potential economic and market impact. Whenever an election approaches, no matter the country, Fisher Investments UK sees an abundance of commentary arguing the results will be make-or-break for markets. Most of it focuses on the leading candidates’ personalities and traditional biases painting some parties as inherently good for markets and others as bad. We saw it with last year’s US election, and now we have seen it in the financial press’s coverage of this year’s European elections.

In Fisher Investments UK’s experience, selecting the best-performing shares doesn’t necessarily determine long-term investing success. Investor behaviour—including staying disciplined through emotional challenges—very often plays a bigger role. A key to maintaining discipline? Realising you could always be wrong. Fisher Investments UK has several basic tips investors can use to put this mindset into practice. One important step to take, in Fisher Investments UK’s view: Avoid overconcentration. Putting a large portion of your assets into a single firm’s shares makes your portfolio vulnerable to company-specific issues—including the risk of collapse.

Which companies will profit most from positive COVID vaccine news? What firms should investors target to benefit from Europe’s Green New Deal? Which shares will benefit most from Joe Biden’s election as America’s new president? Many news commentators Fisher Investments UK follows have speculated about the answers to those questions and others like them in recent months. But investing in specific firms or industries solely because of widely watched events and widely held beliefs is a flawed approach, in our view. When reviewing financial publications, we find speculation about major developments’ impact on certain firms and industries is nearly constant.

When reviewing your portfolio, do you take pride in shares that are up substantially? Do you fixate on the biggest laggards, weighing how much better your portfolio would be without them? In Fisher Investments UK’s experience, many investors do. But fixating on the very best or worst performers can obscure what our research shows matters more: Viewing your portfolio in its totality. Perhaps the temptation to view only the highest fliers or biggest laggards is natural. After all, big returns (whether good or bad) are eye-catching and could easily trigger emotions. In our experience, this often leads investors to conclude they should take some sort of action—either to sell down shares or put more money into good performers. We think there are several problems with this.

Diversification. For generations, many investment professionals have stressed its importance as a means to manage risk whilst capturing the long-term growth many equity investors seek. But what does this actually mean? How can you assess whether you are adequately diversified? In this primer, Fisher Investments UK will share some basics on how we view diversification—and some common pitfalls to avoid we see regularly in investors’ portfolios. In our experience, many investors hear the word “diversification” and think it means simply owning more than one security or a few securities. This is, to an extent, correct. But it also vastly oversimplifies the subject.

Fisher Investments UK thinks a critical component of successful long-term equity investing is participating in bull markets—prolonged periods of generally rising equity markets. This may sound obvious, but it can be challenging to see when a bull market is underway. Whilst seemingly counterintuitive, our research indicates bull markets usually start when economic data are awful. Based on our study of history, the prevalence of dreary news and widespread pessimism we see today is common in early bull markets—one reason we are optimistic about where equity markets are headed from here. What drives equities fundamentally? We think they look ahead to the next 3–30 months, focused mostly on the economic and political conditions that may impact corporate profits.

There are many ways to classify shares, including by sector and country or region. We think another useful way is to distinguish between two main types of investing styles: value and growth. From a global, top-down perspective (meaning, considering broad categories before choosing individual shares), knowing how sectors, countries and regions overlap with value and growth characteristics can be helpful for determining how to weight them in your portfolio. To begin, what is value and growth investing? Whilst criteria differ, we find a common trait of value investors is seeking bargains amongst shares with low prices relative to valuation metrics—like comparing share price to per-share corporate profits, dividends or sales.

There are myriad theories explaining what drives equity markets. Trying to wade through them all could prove bewildering. Yet, in our view, it is important for investors to identify which factors do—and typically don’t—drive markets meaningfully. Here we cut through the clutter to help you understand why we think markets move as they do. In our view, equity prices, like most prices in a market economy, are driven by supply and demand trends. Supply is the total number of publicly traded companies’ shares outstanding—which ordinarily doesn’t change much in the near term.

Since European nations and the US began locking down their national economies in order to contain the spread of COVID-19 in March, financial commentators we follow have fixated on economic data that measure the impact. Most of the numbers were huge, including enormous dips and historically large rebounds. Many analysts warn Q2 gross domestic product (GDP, a government-produced measure of economic output) could be dramatically bad, before leaping in Q3, tied to broader economic reopenings. As such huge numbers and extreme swings can be daunting, we thought investors would benefit from a primer on what various economic data measure and what the numbers mean. The main monthly indicators in most countries are retail sales and industrial production.

With countries gradually reopening from COVID-19 lockdowns, governments’ focus seems to be shifting from what measures they should take to curtail the virus’s spread to how to respond to the economic impact of said measures. In the eurozone, some have proposed a long-debated measure as a potential solution: pooled sovereign debt (also known as collectivising or mutualising it)—a concept we will explain in further detail below. Most recently, Germany—long against the notion of sharing debt with other eurozone countries—and France announced they would bless the issuance of €500 billion in joint EU debt to help member-states fund their coronavirus responses.

Investors face a real challenge in managing their investments through what is hopefully a long, happy and comfortable retirement. Today, many can expect a retirement of 30 years or more—that means needing your money to work for you for at least that long. If you’re hoping to leave money to a spouse, heir or charitable cause, you’ll need your money to last even longer. Needless to say, the stakes are high. We’ve helped thousands of individuals and families plan for a comfortable retirement, so we know the quality of your retirement depends, in part, on the investment decisions you make today and over the coming years. Below we discuss some of the most common retirement investing mistakes so you can avoid them and plan better for the long term.

When fallout from COVID-19’s global spread walloped equities in February and March, financial news coverage showed sentiment—investor and otherwise—plunged. Headlines keyed first on contagion stats and death rates, then on the massive economic impact of worldwide business shutdowns. Fear appeared pervasive—and, in our view, it will likely remain so for some time. The good news: Equities don’t need fear to recede in order to rise, in our experience. Our analysis shows they typically begin to climb higher amid widespread dread.

When equity markets get extremely rocky—as they have no doubt been since mid-February—many investors often seek what they perceive to be safe assets. In our experience, many equate this with fixed-interest securities. In the short term, fixed-interest securities typically see less price volatility than equities—a potentially attractive quality when shares are gyrating. Whilst the ability to dampen volatility in equity portions’ of investors’ portfolios is a useful feature, especially today, we think some take it too far, viewing fixed interest as inherently safe and equities as inherently risky. In our experience, volatile times bolster this perception.

It’s no secret many investors struggle with market volatility. But volatility can actually be your best friend. When many people think about volatility, they imagine stock market corrections and steep market declines. In reality, volatility is a two-way street. Volatility to the upside is just as significant and helps drive stocks’ long-term rise. You probably like volatility when it’s to the upside (although you probably don’t think of it as “volatility”) and you probably hate the downside variety. Here’s another example. Many investors exclaim their disdain for equities after a downturn, but these same people have huge appetites for shares during a roaring bull market.

With 2020 upon us, many investors may be reviewing their portfolio’s 2019 path and mulling over possible adjustments for this year. If you are one of them, here are some factors we think are worth considering. 1. Review your asset allocation—the mix of equities, fixed interest securities, cash or other securities in your portfolio. If you have multiple investment accounts, we suggest doing this for each to arrive at your overall asset allocation. For those owning equity or fixed interest funds, note that their contents might not be apparent from their name (e.g., “Balanced Growth”). Perhaps examine the individual securities they contain to see what asset category (or categories) they belong to.

When Fisher Investments UK looks back through history, we note many Ponzi schemes and investing scams have this in common:  They promise steady, positive returns that are close to the 10% historic average annual return of equities—as measured by the S&P 500 Index.[i] The siren song of smooth, positive returns with limited volatility can be hard to resist. Wouldn’t it be great to grow your assets predictably, with no unforeseen or uncomfortable dips in value? The only problem is that this is too good to be true. “Average” market returns simply aren’t that normal. Before providing more evidence about the rarity of “average” returns—a brief warning.

For the better part of the past year, Ken Fisher (founder of Fisher Investments Worldwide) has preached a simple message to readers of his global market commentary: The sooner Brexit happens, the better off the UK’s economy and equity markets will be. Perhaps counter-intuitively, the recent run of dreary economic data helps explain why. As a general rule, equity markets hate rising uncertainty and love falling uncertainty. Elevated uncertainty discourages risk-taking, which harms investment. Think like a business leader—one of Ken Fisher’s favourite tactics to assess the economic impact of policy changes and this becomes clear. Many business projects are long-term in nature. The payoff might not come for years down the line.

In the world of investing, fixed interest is often associated with being a “safe” investment option. After all, the name fixed interest implies the income you receive is a “fixed” amount. This school of thought often leads investors who have long-term growth needs to forgo potentially better growth opportunities for what they consider to be safer investment options. But just how safe are fixed interest securities? The answer depends on your definition of “safe.” Does your definition of safe mean a higher probability of low short-term volatility? If so, you could consider fixed interest a safe option.

Age is just a number. Whilst it’s certainly not a meaningless number, when it comes to your investment asset allocation decisions, it shouldn’t be the only factor you consider. Asset allocation is the mix of equities, fixed interest securities, cash and other securities that makes up your investment portfolio. Selecting the appropriate asset allocation mix for your portfolio is an important decision to make, and different investment managers, financial professionals and individuals may have varying methods on determining it. A popular method is based on your age. Some might suggest subtracting your current age from another number (such as 100) to determine what percentage of your portfolio you should have in equites.

Editors’ note: Following the publication of this article, H2O Asset Management contacted us to challenge the financial media’s characterization of this saga, including some of the sources we used, and stressed that they did not gate the funds in question. We have amended our text to clarify that the firm introduced its policy of swing pricing in 2017, and we are providing both sides of this story as a way to highlight the importance of analyzing funds’ redemption rules yourself. Do you know how easy—or hard—it is to redeem your fund investments for cash? We think you should.