The MAM Blog – Preparing for Uncertainty

Murray Asset Management – Investment Management Team

Preparing for Uncertainty
We ought to be getting quite good at uncertainty these days, as investors. In recent memory, we have had crises in the credit markets; the Year 2000 software quandary; wars both military and trade; rather more General Elections than are usual; and of course, the question of whether, and how, the UK will leave the European Union.
Against this background, we are regularly asked by clients whether they should be doing something differently to prepare for a forthcoming shock.
The answer is usually ‘probably not’ – but the reasons for saying so are worth rehearsing, because it’s important to make sure – regularly – that your investments are appropriately positioned for your needs.

As an illustration, the chart below gives just one historical example of market uncertainty.

(Source: Thomson Reuters Eikon)

An investor entering the market towards the left of the chart would have had to wait some time for the money they had invested to recoup the ground lost in this particular market shock.
Context, though, is important.

(Source: Thomson Reuters Eikon)

This is the same chart with the dates added, showing that this was the reaction of the FT All-Share Index to the global stock market collapse known as ‘Black Monday’ – a systemic collapse of hitherto unseen proportions.

Now look at Black Monday in today’s terms.

(Source: Thomson Reuters Eikon)

What messages should we take from this experience?

1. Stock market investment is necessarily a medium- to long-term proposition
It is rare for an entire market’s fortunes to turn around permanently, overnight. A single company’s shares can of course experience sudden shocks, from which they may or may not recover. An entire market does not perform in the same way, and a diversified portfolio should therefore be insulated, to a degree, against short term corrections – as long as it is allowed time to recover.

2. Investors’ investments must match, as closely as possible, their specific aims
A short term investment, against a specific outcome, is unlikely to have a role in a portfolio intended to cover a specific funding need – whether it is school fees or retirement savings, the finite nature of the need should be matched with a similarly-risked (or rather, de-risked) investment.

3. Short-term shocks should not be a factor for stock market investors
The best preparation, therefore, for a possible short-term correction is to reassess the time frame for which the funds in question are invested. If the investor’s priorities can no longer withstand the vagaries of the market, they should be sheltered from stock market risk. If there is time to allow for recovery, short term actions may not be required.
In summary, investors should remain aware of the way in which their own needs change over time. If those needs have become more immediate, a conversation with their financial adviser is important.