Client expectations may well have been warped by the bizarre nature of 2020. Client conversation are likely to be uncannily repetitive, with people trying to make sense of the macroeconomic environment amid the pandemic, each with their own opinion on the path ahead. Some will think markets are going to crash… others that bitcoin will hit £100,000 in the next year… and some will expect you to have the financial answers.
From political turmoil to the global pandemic, we have had plenty of noise to deal with. Clients’ emotions are running hot. So, asking people to ‘stay the course’ is obviously difficult. As advisers know, it is not always about sitting still – even though this is often the most appropriate path – but rather, to focus on the goal you set in the first place and ensure your behaviour aligns with it.
Preparation over prediction
If the last year has taught us anything, it is that advisers cannot always predict, but they can prepare. In financial planning, clients are often advised to reassess their financial goals when faced with important life events and/or changes – such as getting married, having a child or coping with the loss of a loved one. This year, a significant event is happening with the aftermath of Covid-19, impacting investors globally.
For those advisers who use outsourced solutions – whether that is funds or managed portfolios – getting your client storytelling straight is important. In this regard, now is a good time for investors. To help give clients confidence amid the uncertainty and to deliver on financial goals, you only need to get three things right.
First, adopt a tried-and-tested investment approach that is based on sound investment principles to guide decision-making in uncertain times. Second, run a robust process that manages risk so you keep behavioural biases in check. Third, capture the opportunities using deep research, letting the probabilities and compounding carry you. To that end, it is worth bearing three more broad points in mind.
* Stocks beat inflation 100% of the time … over 20-year periods: That is not to say markets will always beat inflation – just that historically the general direction has been up. This is true in the UK and US, so any grappling between the two can often be put to bed with the reality that both are likely to do just fine if we close our eyes for long enough.
And for good reason: investments are tied to businesses, so as long as the economy grows and businesses are well-run, investors can expect to generally benefit from the investments they own. Holding money in cash or under the mattress ensures not only that it will not grow but, worse, that it will shrink over time as inflation erodes its value.
* A great portfolio should stand up to many environments, not just one: In 2020, not even the wildest of market predictions was right. If someone had asked you how the market would perform if a global pandemic hit, causing widespread job losses and the biggest contraction in the economy for around 90 years, it is very unlikely you would have described today’s reality.
Investment managers need to prioritise risk management to avoid major drawdowns. Often, the biggest risk is the one the average investor cannot see – after all, if it was seen, it would be priced in. This means it pays to diversify intelligently. Testing out your portfolio in a wide range of scenarios is good preparation and helps you achieve the right balance in portfolios. While some key markets may look expensive according to our research, therefore, we still believe we can deliver strong outcomes, especially on a risk-adjusted basis.
* In 2021, finding diversifiers has become just as important as bargains: History is littered with moments of client concern. In the last 100 years, we have had two world wars, a Great Depression, countless recessions and now a global pandemic. Yet, the market always offered opportunities for investors and, for our part, we build portfolios in a way that reflects our best research.
After the big rally, investors have had to look harder to find opportunities, kiss more frogs, research more markets. More focus is also needed on diversifying assets that can help portfolios withstand big economic changes. The recent market moves have caused extreme divergence that are noteworthy developments – for example, growth versus value, technology versus energy, or the UK versus the US – which create a vivid opportunity to add value.
When it comes to investment decisions, fear and greed hurt more than they help. Your clients will benefit from your guidance and need a strong investment proposition to see them achieve their goals – aided by key messages that give them confidence they are in safe hands.
Mike Coop is head of multi-asset portfolio management at Morningstar Investment Management Europe
