Far too often, the urgent crowds out the important, running the risk of asset managers making poor judgements that are not in the best long-term interests of their clients.
There is clearly far too much attention placed on short-term issues of performance and the more attention that is paid to such outcomes, the more that capital is pressurised to react to this. If attention is to be paid to very significant issues such as the governance of companies, climate change and significantly improving the performance of business, then we need far more ‘patient’ capital.
The danger also is that we try to adopt new trends or jump onto bandwagons in the hope that something very original has been uncovered. Well-established models developed over the past 40 years of investment returns all incorporate periods of depression, euphoria and all points in between, and these clearly indicate what patient investors can expect as long as they don’t try and chase fads or supposedly innovative funds or products.
Just as we should not be fooled by the ‘too calm’ 1990s and early 2000s, so we should not confuse some volatility with poor overall returns. Longer-term returns routinely include periods of 20% rises and falls, but the important point is to build an overall portfolio where this volatility is not too important.
Recognising these issues is the first step, but we then need to instigate ways of improving the situation. We should appreciate what longer-term models suggest for asset class returns – which for equities is around 6% – and then budget for this type of figure, rather than junk such frameworks. Believing that something significantly better is available runs the risk of being sucked into much riskier and untested products.
We should commit to being patient investors, riding the ups and downs but keeping sight of the longer-term reality, and understand that focus upon the short term is itself extremely risky. We should encourage our trusted asset managers to have greater latitude in terms of their investments, and that there can be good reasons why they on occasion take on more risk as markets shift around.
And finally we need to build portfolios that can withstand the various scenarios that can pan out. One of my favourite phrases is that there are two types of investor, those who don’t know, and those who don’t know they don’t know.
The future is uncertain and to state otherwise is disingenuous. Instead, we should base our portfolios on a range of potential outcomes, on the understanding that we may not hit the highs but we will avoid the lows.
In summary, learn to be a patient longer-term investor, back those managers who follow those principles and build more robust portfolios able to withstand the uncertainties that always exist.
