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Good things come…

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… to those who wait

‘Patience is bitter, but its fruit is sweet’
Aristotle

Good things come to those who wait.  This was the strapline once used by Guinness to refer to the 119.5 seconds it takes to pour a ‘perfect’ pint of their iconic stout[1]. With investing, the time periods we are concerned about are measured in years, rather than seconds.  Looking at your investment portfolio too often only increases the chance that you will be disappointed.  This of course can be challenging at times, particularly during tumultuous markets.

We know that monitoring markets on a monthly basis looks rather stressful, as they yoyo through time whereby there are times during which the market is growing its purchasing power (i.e. beating inflation) and there are times when it is contracting.

The evident day-on-day and month-on-month yoyo is a consequence of new information being factored into prices on an ongoing basis.  Investors around the world digest this information, decide whether it will cause a change in a company’s cashflows (or the risks to them occurring), and hold or trade the company’s share accordingly.  These are the concerns of active investors casting judgements on an individual company’s prospects.

Over longer holding periods, the day-to-day worries of more actively managed portfolios are erased, as equity / share markets generate wealth over the longer term.  For instance, between January 1988 and June 2020, monthly rolling 20-year holding periods never resulted in a destruction of purchasing power.  A longer-term view to investing enables individuals to spend more time focusing on what matters most to them and to avoid the anxiety of watching one’s portfolio movements.

This is not to say that investing is a set-and-forget process, however.  Wells Gibson’s Investment Committee meets regularly on your behalf to kick the tyres of the portfolio, after reviewing any new evidence.  Over time there may be incremental changes to your investments (or there might not be) as a result, but the Investment Committee shares the outlook illustrated in the figure above – we have structured your portfolio for the long term, and it is built to weather all storms.

Delving deeper

If we look at longer term market data in the US back to 1927, the result is the same.  Furthermore, we can cherry-pick a 20-year period which is fresh in many investors’ minds: the bottom of the Financial Crisis. In this (extreme) 20-year period, to Feb-09, equity markets had barely recovered from the crash of technology shares in the early 00s, before falling over 50% in 2008/9, in real terms.  These were unsettling times to say the least.

Despite the headwinds, investors had been rewarded substantially for participating in the growth of capital markets over the longer term.  An equity investor viewing their portfolio for the first time in 20 years would have seen their wealth more than double, whilst at the same time the media was reporting headlines such as ‘Worst Crisis Since ‘30s, with No End Yet in Sight’[2].

Have faith in wealth-creation through capitalism and try not to look at your portfolio too often. As the adage goes: ‘look at your cash daily if you need to, your bonds once per year, and stocks every ten’.

Header image by Sarah Mitchell-Baker on Unsplash; York, UK, Looking over the River Ouse in York from Lendal Bridge.
[1] https://www.guinness-storehouse.com/en/guinness-academy
[2] Wall Street Journal, September 18, 2008

Investment Behavioural Biases

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Behavioural biases play a significant role in our decision-making as investors.

Whether we realise it at the time or not, these inherent biases can sometimes contribute more to our portfolio returns than the assets or funds we select.

A new briefing note from investment software provided Dynamic Planner has highlighted the value of understanding behavioural biases, along with other factors, to improve investment outcomes massively.

Dynamic Planner explains that there is extensive evidence about the impact of behavioural biases on investment decisions. But the factors that influence our susceptibility to these biases are less well covered.

By understanding how personality traits and behavioural biases influence our investment decision making and then taking some steps to counteract them, we can reduce the likelihood of making poor investment decisions.

Dynamic Planner identified five essential traits that define personality. In psychology, it is known as the Five-Factor Model – this includes openness to new experience, conscientiousness, extraversion, agreeableness and neuroticism. All of these factors have various facets to them.

The Five-Factor Model

Conscientiousness

This is the extent to which we are dependable, orderly, organised, responsible, practical, thorough or hardworking.

Neuroticism

This occurs when we’re feeling depressed, tense, nervous, angry, unstable, envious, worried or uneasy.

Extraversion

This is what drives us to be sociable, outgoing, energetic, talkative, bold, assertive and adventurous. Introversion often would make you low in this factor.

Openness to experience

This is what has the characteristics of being creative, imaginative, intelligent, analytical, reflective, curious and open-minded.

Agreeableness

This includes the characteristics of being courteous, polite, trusting, nice, kind, gentle, pleasant and sympathetic.

By considering each of the five personality traits, Dynamic Planner has explained how the characteristics fit with well-known investment behavioural biases, along with five ways in which investors can reduce or avoid these biases.

Dynamic Planner outlines below how these characteristics fit with the well-known investment behavioural biases along with five ways clients can reduce or avoid them:

Photo of people queuing by Halacious on Unsplash

Herd mentality

​(agreeable and/or introvert personality traits)

This relates to investors basing their decisions on the actions of others. Whether spurious (making similar decisions to others) or intentional (deliberately imitating behaviour) herding, both can be detrimental.

Investors can avoid herd mentality by not trying to time the market – this can be typical of investors engaging in herding behaviour. Such investors risk making losses and missing out on the highest periods of growth. It is, therefore, best to stay invested and follow the plan.

Anchoring bias

(conscientious, agreeable and/or introvert personality traits)

Investor decisions can be influenced by fixating on a reference point due to uncertainty of assets. They then go onto make comparisons and estimates based on this which is known as anchoring, even though the reference point is arbitrary and irrelevant.

Anchoring can result in the ‘disposition effect’ where subsequent investment decisions can be negatively affected by holding onto losing stocks or funds for too long or selling winning ones too early.

To avoid anchoring bias, ​investors must be objective, communicate with their financial planner and/or make research-based decisions to be less vulnerable to anchoring.

Overconfidence bias

(extravert, openness to experience and/or disagreeable personality traits)

Investors who are overconfident and overoptimistic may take greater risks.

Overconfidence can manifest in an overestimation of investment knowledge and result in an underestimated perceived level of risk. It can also be increased by ‘confirmation bias’ – where new information that supports an existing opinion increases confidence.

To avoid overconfidence bias, investors need to consider the consequences of their actions!

Overconfidence can lead to attempting to time the market due to a perceived level of skill and illusion of control. However, when things go wrong this can result in a greater loss.

Regret aversion

(conscientious and/or emotionally unstable personality traits)

Anticipating regret and envisioning the emotional discomfort of making a poor decision can result in inertia, where investors fail to act or stick with a default option for fear of making an active choice which later turns out to be sub-optimal.

To avoid regret aversion, investors need to have a​ ​systematic approach – following a plan with a diversified portfolio focused on long term investment goals will help investors regulate emotions and avoid succumbing to feelings of fear and regret.

Investors sometimes fall victim to the following:

Recency bias

(emotionally unstable and/or closed to experience personality traits)

Investors evaluate the likelihood of future events on recent memories without putting them in the perspective of the longer-term past.

This often relates to information that is easily accessible and available which can lead to poor investment choices.

To avoid recency bias, investors should have a long-term view for long-term investments to avoid short-term thinking which can lead to recency bias.

Louis Williams, Dynamic Planner’s Head of Psychology & Behavioural Insights said:

“Behavioural biases can influence risk tolerance levels and impact investment choices. However, if advisers can make investors more aware of the powerful biases that can influence their attitudes and behaviour towards financial risk, they can also help them to manage their investment journey in a much more positive way.

“Helping clients to have a much deeper understanding of their own personality and attitude to risk can be a great help in overcoming rash or ill-thought-out decision making when it comes to investments, especially when faced with unpredictable markets or a backdrop of uncertainty such as what we have experienced in recent months with the impact of coronavirus and Brexit transition. While unlikely to happen, if all investors were able to harness the ability to manage the well-known investment behavioural biases, there would be a directly positive impact on the volatility and fragility of markets.”

Header image by Andrew Buchanan on Unsplash
Photo of people queuing by Halacious on Unsplash

The Big Five

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Investors love good stories and in recent years, many of these stories have centered around innovations that have fundamentally changed the way we live our lives.  Some examples might include the release of the original Apple iPhone in 2007, the delivery of Tesla’s first electric cars in 2012 and the launch of Amazon Prime’s same-day delivery service in 2015.

No doubt, many of you will have had conversations with friends and family around the successes, failures, and prospects of some of the world’s largest companies and the goods and services they offer.  In this article, we take a deeper look at the ‘Big Five’ tech companies – Amazon, Apple, Alphabet (Google), Facebook and Microsoft – through the lens of the long-term investor.

The ‘Big Five’, images from Unsplash [1]

In what has been a turbulent year thus far, some larger firms have come through the first, and hopefully last, wave of the ongoing pandemic relatively unscathed.  Those investors putting their nest eggs entirely in any combination of the ‘Big Five’ would appear to have done astonishingly well relative to something sensible like the MSCI All-Country World Index, which constitutes 3,000 of the world’s largest companies.  At time of writing, Amazon’s share price has faired best, increasing 75% since the beginning of the year.

These types of firms tend to struggle to stay out of the headlines for one reason or another.  Perhaps as a result, many of the investment funds found in ‘top buy’ lists have overweight positions in one or more of these companies.  Many of today’s most popular funds are making big bets on one or more of these companies, anticipating that the past will repeat itself moving forwards.

Sticking to the long-term view

The challenge for these managers, and others making similarly large bets, is that these are portfolios that will be needed to meet the needs of individuals over lifelong investment horizons, which for the vast majority of people means decades, not years. With the benefit of hindsight, managers who have placed their faith in these companies have stellar track records since Facebook’s listing on the market in 2012.

However, an interesting exercise would be to investigate the outcomes of these companies over a longer period of time, for example 30-years seems more prudent. This is somewhat difficult given that 30-years ago, 3 of these companies did not exist, Mark Zuckerberg of Facebook was 6-years old, Apple came in at 96th on Fortune’s 500 list of America’s largest companies and Microsoft had just launched Microsoft Office.

A partial solution to this problem is to perform the exercise from the perspective of an investor in 1996, which is the start of Financial Times’ public market capitalisation record.

The ‘Class of 96 Big Five’ consisted of General Electric, Royal Dutch Shell, Coca-Cola, Nippon Telegraph and Telephone and Exxon Mobil.  A hypothetical investor with their assets invested in either Coca-Cola or Exxon would have just about beaten the market over this period, those in Royal Dutch Shell, Nippon Telegraph and Telephone and General Electric were not so lucky.

This exercise is illustrative only, however a closer look is enough to see that almost no investor would want to stomach the roller coaster ride they would have been on in any one of these single-company portfolios.

Summary

The beauty of the globally diversified, systematic approach adopted by Wells Gibson, is that judgemental calls such as these are left to the aggregate view of all investors in the marketplace.

No firm is immune to the risks and rewards of capitalism; be it competition from Costco or Walmart taking some of Amazon’s market share, publishing laws causing Facebook to apply heavy restrictions on its users or some breakthrough smartphone entering the marketplace that is years ahead of Apple – remember Nokia?

Rather than supposing that companies who have done well recently will continue to do well, systematic investors can rest easy knowing that they will participate in the upside of the next ‘Big Five’, the ‘Big Five’ after that and each subsequent ‘Big Five’.

Those who can block out the noise of good stories and jumping on bandwagons are usually rewarded over time.

“But the problem that people don’t understand is that active managers, almost by definition, have to be poorly diversified. Otherwise, they’re not really active. They have to make bets. What that means is there’s a huge dispersion of outcomes that are totally consistent with just chance. There’s no skill involved in it. It’s just good luck or bad luck.”

Eugene Fama – Nobel laureate

Feeling Positive About Money Despite the Pandemic

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Are you feeling positive about the state of your finances right now? Especially amidst the pandemic?

One trend emerging from the Covid-19 pandemic and the associated lockdown was a typical cut in spending.

According to new research, nearly half of us are staying positive about our money matters after lowering our spending levels.

But, as the shops reopen for business, the fashion sector could suffer as more than two-thirds of shoppers say they will consciously spend less on clothing.

Cashback website, Top Cashback, spoke to people about their money sentiments.

When they asked the question before the lockdown, they found that 80% of us felt optimistic.

Turning to today, the same question prompted only 60% of people to claim they are feeling optimistic when it comes to their finances.

12% said they are feeling pessimistic.

Of those who are feeling optimistic about their financial future, nearly half said they were spending less money during the lockdown.

Half of the respondents said their financial circumstances look different following the pandemic, although not necessarily worse.

Some people are spending more money since the onset of the lockdown, with 20% experiencing higher food bills, or splashing out more cash on home improvements.

Thinking about steps we could have taken to be better financially prepared before the Covid-19 pandemic hit, nearly a fifth said they would have saved more money each month.

However, 455 said there was nothing more they could have done to better prepare their finances.

Adam Bullock, UK Director of TopCashback.co.uk, said:

“It’s encouraging to see a percentage of people feeling optimistic about their finances, despite the current climate. However, it’s also important to remember that we, as an entire population, may be feeling the effects of the pandemic for years to come.

“Whilst every financial situation is particular to the individual, as a money-saving platform, we would always encourage people to save money where and when they can. Now is a great time to be analysing your finances so that when normal returns (if ever that happens) you will hopefully be feeling some of the benefits of learned behaviours.”

At times like this, it is possible to be prepared – this can be achieved by having a wealth plan. It is important to plan your financial future to accommodate for many potential scenarios, especially if you’re a business owners or practice owner professional.

If you would like to speak with a wealth planner, you can contact us via email, scheduling your Exploration Call or by our online contact form on our website.

We provide lifetime wealth planning tailored to you and your personal situation and circumstance and would love to hear from you.

Energy Regulator Plans for a Greener Britain

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Energy regulator Ofgem has published plans designed to cut household energy bills by £20 a year.

The plans would see energy providers cutting their return on investments, instead investing £25 billion over the next five years on greener energy.

This brings us to the topic of ESG in investing. It is becoming more evident that in the coming years, sustainable investing will be an important factor for investors and therefore for wealth planners, when it comes to fund selection.

At Wells Gibson, we will include low-cost, systematic and sustainable funds in our portfolios when required – these funds invest in companies that meet certain environmental, social and governance factors.

“Socially responsible investing, or social investment, also known as sustainable, socially conscious, “green” or ethical investing, is any investment strategy which seeks to consider both financial return and social/environmental good to bring about social change regarded as positive by proponents.” [1]

We can certainly see a shift in attitude towards greener energy and the implementation of this.

Green maple leaf in sunlight photo by Ben Moore on Unsplash

Under the present system, around a quarter of consumers’ domestic energy bills go towards network upgrades and maintenance. Investors can achieve a return of nearly 8% on these projects.

According to Ofgem, the plans are designed “to deliver a greener, fairer energy system for consumers.”

Despite being good news for consumers and the environment, energy providers were quick to criticise the plans.

National Grid said:

“We are extremely disappointed with this draft determination which risks undermining the process established by Ofgem.

“This proposal leaves us concerned as to our ability to deliver resilient and reliable networks, and jeopardises the delivery of the energy transition and the green recovery.”

However, Ofgem claims investing in the UK’s energy network is low-risk, making it an attractive proposition for investors. Ofgem said:

“Strong evidence from water regulation and Ofgem’s offshore transmission regime shows that investors will accept lower returns and continue to invest robustly in the sector.”

Also critical of the plans, was Rob McDonald, managing director of transmission at Perth-based SSE.

However, the plans would contribute towards the UK’s target of reaching net-zero emissions by 2050, which need a significant increase in renewable energy and investment to improve the stability of energy networks.

Ofgem’s price control system allows it to impose limits on the profit energy providers can make, once network operators present their plans for the work they will do and establish the costs.

If you would have any questions, please don’t hesitate to get in contact.  Alternatively, if you would like to learn more about Wells Gibson, we would encourage you to schedule an Exploration Call using the contact form on our website. We would love to hear from you.

[1] https://en.wikipedia.org/wiki/Socially_responsible_investing
Header image by Karsten Würth on Unsplash