CRYSTAL BALL GAZING – YOU CAN’T ALWAYS PREDICT THE FINANCIAL FUTURE

You’ll have heard the saying ‘the only certainty in life is death and taxes’. A bit morbid but probably true given how uncertain the world is at the moment. There’s been the global impact of Covid which came out of the blue. Now we’ve got the uncertainty of what’s happening In the Ukraine with NATO and Russia.

Closer to home there’s still the legacy of the Covid crisis which hopefully is coming to an end as populations gather immunity through vaccination and infection. The development of new drugs and treatments are really helping as they come online almost daily.

Global uncertainties are having an impact on the markets and investments. Economically, the greatest challenge is soaring inflation, hitting levels not seen for several decades. This has led to interest rates and yields on bonds starting to rise and global equity markets having a disappointing start to the year. This can all feel both gloomy and unsettling.

It’s always easy to feel that the present is more uncertain than in the past. We’ve all but forgotten the Armageddon scenarios. Remember Y2K software bug issues of 2000? It was predicted that planes would fall out of the sky, nuclear power stations go out of control and computers would crash. Then there was the emotional and geopolitical impact of 9/11. 2008 saw the failure of Lehman Brothers when the melt down of the financial system was a real risk.

At the time events like these feel overwhelming and disastrous for the long-term. However this chart shows that over the mid to longer term the markets do absorb the impact of such events and continue to advance. Being shaken out of markets based on today’s news is about the worst mistake any long-term investor can make.

Figure 1: Material global events are ever present

Data source: Vanguard Global Stock Index ACC, 4/8/1998 to 14/2/2022 in GBP used as proxy for the performance of global equities. Its use in this chart does not constitute any form of recommendation and is provided for educational purposes only.

What should we do?

The short answer is ‘not much’.

As ever, all the news that we see and worry about – including a possible invasion of Ukraine by Russia – is already reflected in market prices. For sure, new news will have an influence on those prices, but by its very definition this is a random process that is hard to benefit from unless you own a crystal ball.

In terms of direct portfolio exposure, it’s worth noting that Russia represents around 0.35% of global equity markets, and that’s before this is diluted down in any portfolio by bond holdings. To put this in perspective, the global market weight of Apple is over 4%! In fact, Apple’s cash reserves alone are of a broadly similar magnitude to Russia’s entire market capitalisation.

No-one has any real idea as to the wider impact of a Russian invasion, but even if it happens, and even if markets fall, do remember that:

1. Equity markets can go down – sometimes materially – as part of their journey to delivering positive longer-term returns after inflation.
2. Feeling uncertain about markets is not a valid reason for seeking to get out of them. If, in the unlikely event, that your financial and personal circumstances have changed to such an extent that you need immediate liquidity from your equity positions, speak to your adviser.
3. Our high-quality bonds provide the defensive support:
   • Stable values, supporting a portfolio against equity market falls
   • Liquidity to meet any liabilities without having to sell equities when they are down
   • The ability to rebalance the portfolio and buy more equities when they have fallen to get the portfolio back up to the right level of risk.

One simple answer it to try not to look at the news too much. It can feel unsettling and is increasingly full of sensationalist speculation. Instead, perhaps take a look at a news site that tries to balance out the regular news with positive news stories which tend to be underreported such as www.goodnewsnetwork.org/category/news/

This article is distributed for educational purposes and should not be considered investment advice or an offer of any security for sale. This article contains the opinions of the author but not necessarily the Firm and does not represent a recommendation of any particular security, strategy, or investment product. Information contained herein has been obtained from sources believed to be reliable but is not guaranteed.

Past performance can’t guarantee what investments will do in the future. The value of a portfolio can go down as well as up, so there’s a chance you’d get back less than you put in.