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Long Term Investments

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

Making Sense of Your Pensions and Investments

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Are you investing sensibly?

What constitutes sensible investing is different for everyone and depends substantially on your current financial situation, present circumstances, future goals and risk tolerance.   Having said that, there are universally applicable points to bear in mind.

The majority of people keep their savings in the same, low-interest rate bank account for years on end without looking for better returns elsewhere.  There’s a good reason for this – traditional savings accounts offer safety and security because they are very low risk.  Unfortunately, they also offer very low chances of earning any money.  In fact, the majority of savings accounts perform well below inflation, so in the long-term it’s likely your money will actually be worth less a decade after investment than it was when initially banked.

When considering where to invest your money, think about your goals and your needs.  Are you saving for something long-term – for example your pension – or something more short-term, such as a deposit for your child’s first home?  The length of time you’re willing to invest your money will affect how much risk is appropriate.  Short-term goals are often best kept low risk, i.e. held in traditional savings accounts.  Long-term goals on the other hand can tolerate higher risk levels, because most losses will be recouped over time and will generally be offset by gains.

However, many people are deterred from exploring alternative investment options because they fear they will lose their hard-earned money.  It’s a very real concern, as poor investment decisions can be very expensive.  There is a solution though.  To mitigate risk, it’s important to split your savings across different investment platforms.  Why?  Because different investment options have correspondingly different risk levels.  For example, investing in emerging markets is riskier than investing in UK and American markets, and investing in smaller or start-up companies is riskier than investing in more established, bigger firms.  The most sensible way to invest is to diversify your portfolio – by spreading your money across equities, commodities, bonds and other asset classes, you minimise risk and increase your chances of maintaining and building wealth in the long term.

Although the amount of risk you are willing to take is a matter of personal preference, a wealth planner such as Wells Gibson can help you understand all of the available options, so that your resulting portfolio reflects and aligns with your financial attitude.  Sometimes the potential returns on high risk products can be alluring, but unless you fully understand the dangers involved and are investing an amount you can afford to lose, then they are best avoided.   In particular, these kinds of investments shouldn’t be made without professional advice.  

Whilst diversifying your investments is the most sensible approach to long-term savings, it’s imperative that you don’t just place your money in these different pots then simply hope for the best.  Whilst the majority of investments manage themselves, it’s important to regularly reassess their risk levels – at least annually – and re-allocate your funds accordingly.   However, a watched pot doesn’t boil.  Checking your investments too frequently can lead to knee-jerk reactions – moving your money every time prices rise or fall in an unexpected way.   Remember that markets are always fluctuating, and the majority of long-term investments will cope with these fluctuations.

Even with this knowledge, it can be difficult to decide where to invest or what financial products to invest in.  Working with a wealth planner such as Wells Gibson can give you the confidence and reassurance you need to take the plunge.

Do you need help investing? You can contact us via email at integrity@wellsgibson.uk or by our online contact form on our website, which can be found here. If you would prefer to have a talk in person over video call, you can do so by scheduling an Exploration Call with us here.

Commercial Property in a Post-Covid World

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What are the prospects for commercial property in the future?

This is one of the most commonly asked questions by many, as a result of our current affairs.

Our New ‘Normal’

We have all by now – in our new normal world – gotten used to meeting our dearest friends, family, confidants and work colleagues via Zoom or Skype. Whether it be working from home, group meetups with friends, family catchups or shopping online.

High streets and shopping malls were struggling even before the events of 2020; with Debenhams and several middle-market food chains struggling. This has led some investors to beg the question – what does the future hold for commercial property?

Will everyone work from home? Will companies reduce their office space needs, providing workers with a hot desk each morning, if they are in? Will retail companies go into administration to put pressure on landlords to reduce rents? Will more people shop online?

The answer to all of the questions above, is probably ‘yes’.

Edinburgh
Photo of buildings in Edinburgh

What does this mean for Commercial Property?

Does that mean that we should all abandon a well-diversified, liquid exposure to global commercial property accessed via real estate investment trusts (REITS), which are listed property companies, focused almost exclusively on generating rental income? We think not.

First, let us look at the flipside of the changes that are occurring.  To be sure, some sectors may struggle.  But for every Debenhams, there will be a company moving into, or even starting up, online, which will require logistics centres and warehousing.

In our digital age, there is increasing demand for secure and up-to-date data centres. For example, improved and more numerous healthcare facilities.  You can see from the chart below [Figure 1] that the global commercial property REITs, real estate investment trusts, cover many things.

Figure 1: Commercial property REITs represent a basket of multiple property types

Source: FTSE EPRA Nareit Developed Index Factsheet www.research.ftserussell.com

As we can see above, commercial property REITs cover a range of property types. These property types can include industrial and office spaces, holding and development, specialty, residential, retail, hotels and lodging facilities. All of which, will still be required in our post-Covid future.

In a globally diversified REIT index fund, there are over 350 individual REITs (listed property companies) each of which is comparable to a property fund in its own right.  It is estimated that such a fund contains around 90,000 properties [2] spread across property types, global markets, and strategies – this is hugely diversified.

Second, let us spend a moment thinking about markets.

Photo of shop in Edinburgh

Concerns About Markets Over Time

These worries about the retail sector, for example, have been around for some time and you will not be the only person thinking about these issues.  In fact, thousands – or even millions – of people will already have done so and acted on their view of the future of property, by buying and selling these REITs in the market.

The aggregate view will be reflected in today’s REIT prices: all the doom, gloom and uncertainty is priced into the process of REITs already; all the likelihood that the way we work changes is priced in already; and all the good news about data centres and warehousing is priced in already.

Future Prospects of Commercial Property

So, the future prospects for commercial property will depend on what happens relative to this expectation.  It may be better or worse, depending on information we do not yet know.  The release of that information is random.  What we do now is that commercial property will continue to be needed and that companies will have to pay rent.  We would not abandon owning a diversified equity portfolio because some sectors are struggling (airlines and energy) or concentrate our portfolio in sectors that are booming (technology).  It is already in the price.  Companies and sectors wax and wane.

Third, let us think about why we hold it in portfolios in the first place.  Property tends to have a different return experience to equities (even though property companies are listed on stock markets).  At specific times, and across time, this can provide diversification to a portfolio.  In addition, over time property has provided protection from inflation; after all, a property is a property and many rental agreements are linked to some measure of inflation.  With the rapid increase in the money supply, on account of all the government support packages around the world, higher inflation – not something most feel the need to worry about currently – is one future scenario.  Cover the bases – but all things in moderation – is a sensible approach.  A small allocation to global commercial property still makes sense for long-term investors, as part of their diversified growth assets.

What this means for Wells Gibson

At Wells Gibson, we build a deeply diversified portfolio for our clients and we let capital markets do the heavy return lifting. We look beyond the headlines of daily market news and commentary and maintain a long-term perspective. Holding securities across many market segments can help manage overall risk, the above being no different.

We create an investment plan to fit your needs and risk tolerance, diversify globally and stay disciplined through the inevitable market dips, turns, twists and swings.

As always, if you have any questions related to the above, suggestions for future topics to cover or anything else, please do not hesitate to get in touch with us. You can do this via our online contact form, email or our various social channels.

References

[1] Figure 1 Source: FTSE EPRA Nareit Developed Index Factsheet www.research.ftserussell.com

[2] Source: Prologis is the largest REIT at 5% of the index and owns ~4,500 properties.  Scaling this up implies around 90,000 properties across the index, as a rough proxy.

https://www.ftserussell.com/

https://www.albionstrategic.com/

All photos are from Unsplash.

Header photo by Étienne Beauregard-Riverin.

Modern Apartment Building by Grant Lemons

Edinburgh photos by RΛN SHOT FIRST and Madeleine Kohler.

Disclaimer and Risk Warnings

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 is not indicative of future results and no representation is made that the stated results will be replicated.