Investment and Trust

At a time when elevated market activity can lead to knee-jerk reactions, it is worth remembering the advantages of long-term investing

Most of us would agree that 2016 was an eventful year for investors, as the Brexit vote and the US election result surprised the world. We all know that markets do not like uncertainty. So, just like previous unexpected events, the EU referendum and the US election generated volatility. And market volatility – whatever the source – can trigger an automatic response in people, particularly when markets head in a downward direction.

This is understandable: a constant flow of news and sensationalist headlines can dent confidence. A natural instinct may be to cut our losses, but we should remind ourselves that a knee-jerk reaction might not be in our best interests. The Cambridge Dictionary defines it as a ‘quick reaction that does not allow you time to consider something carefully’. However, when it comes to investing money for long-term, long-cherished goals, careful consideration is paramount.

Back to basics

It is no secret that long-term investments can experience shortterm gyrations, whether because of market surprises or more sustained periods of uncertainty. This can be unnerving. But taking that all-important long-term view is a fundamental rule of investment that should not be overlooked in times of volatility (which we should remember are not synonymous with risk). For one thing, it means that you are not a slave to the rhythm of the markets. Any investors who react to the shifts in the market on a short-term basis could be setting themselves up for an uncomfortable existence. Change is often the only constant: governments come and go, economies wax and wane, political alliances switch and businesses experience reversals of fortune. Markets need time to resettle.

Seasoned investors and investment professionals know that holding on to an investment over the long term, even when it is underperforming, is usually more rewarding than a ‘get in, get out and turn a quick profit’ mentality. That is because investing over the long term normally means that short-term ‘blips’ are smoothed out with the passing of time, and tends to lead to better returns. Of course, it is only natural to be tempted to sell out of what may seem to be poorer-performing markets, to chase what look like enticing short-term profits – especially in the current prolonged period of economic unpredictability. But this can be short-sighted, given that markets tend to be cyclical. And falling markets can also present buying opportunities.

Anyone pondering a switch to a more short-term strategy might also like to bear in mind that switching investments will make any losses a reality. After all, losses only exist on paper until the investment is actually redeemed.

They might also reflect on some of the often quoted comments of one of the most successful investors of our times. Warren Buffet’s pithy views such as “Put your emotions aside” and “Someone’s sitting in the shade today because someone planted a tree a long time ago” may be tough to consider in times of market uncertainty. But they remind us of key ingredients for successful investment: a long-term view, patience and the discipline to ride out financial storms.

Long-term relationships

It’s all very well for Warren Buffet, you might think. But how do the rest of us cope with market fluctuations, when we don’t have a spare few billions to play with? The answer is to seek reassurance rather than reacting. And we can do that by revisiting the reasons why investment decisions were taken in the first place – whether we made those decisions ourselves, or by authorising our advisers to make a choice on our behalf.

Market news and sensationalist headlines can dent investor confidence

Firstly, remember that your investment management company was chosen carefully, based on its reputation. Either you or your adviser placed trust in that company’s knowledge and expertise, based on criteria such as the longevity of the business and the volume of assets it already manages. It is worth remembering too, that a reputable company which puts its customers first is highly focused on achieving its clients’ goals. And a long-term track record is also often viewed as a strong indicator that an investment is in expert hands.

Investors and advisers should also be mindful that experienced investment managers have seen it all before. They will have witnessed a variety of investment cycles and will be accustomed to managing change. Consider the often-quoted comment by investor and philanthropist Sir John Templeton: “The four most dangerous words in investing are: ‘this time it’s different’.” The chances are: it probably isn’t.

A change that investors should always pay close attention to, however, is any change in personal circumstances that may require a re-think of investment strategy. That is why it is so important to review investment goals on a regular basis and make any necessary (not knee-jerk) adjustments.

The value of communication

In uncertain times (and in less uncertain times), good communication is vital. If an investment seems to be experiencing a bumpy patch, investors and advisers should ask why, rather than making assumptions or decisions based on media reports or a short-term blip.

It is only natural to be concerned about negative news, but good, forward-thinking investment professionals will have done their best to fortify portfolios against any shocks that they foresee. The same goes for headlines about stellar short-term performance of a particular fund or asset class. It is all too easy to be swayed by these and tempted to take an alternative course, but there could be a price to pay. Any short-term gains could be offset by the loss of long-term opportunities.

Also, most reputable portfolio managers provide clear and timely investment communications, to update on market movements. Investors and advisers may benefit from signing up to these, for deeper market insights and more information on factors affecting short-term performance.

Emotional intelligence

How else can we maintain a long-term investment view during market fluctuations? Tuning out unnecessary market ‘noise’, whether positive or negative, or seeking views from experts of course helps. But emotional intelligence is also key, which means being aware of a very human tendency towards irrationality. The field of behavioural finance has shown that we do not behave as rationally as we think we do, when it comes to investment.

Research by behavioural economists Amos Tversky and Daniel Kahneman found that financial losses appear to have a greater impact on our emotions than the same amount of gain. So, it is worth bearing in mind the potential for overreaction when investment performance flickers: reflecting on the impact of emotion could avoid taking actions that might be regretted later on. As renowned economist and investor Benjamin Graham said: “The investor’s chief problem – and even his worst enemy – is likely to be himself.” Don’t let that be you.

The value of your investments can fall as well as rise, and they may be worth less than you paid in, even over longer time periods

Alternative investing: classic cars

The classic car market has picked up speed in recent years, but pleasure, rather than potential profit, is the key driver for many first-time owners

Alternative investing: classic cars

When it comes to so-called ‘passion investing’, luxury assets like art, watches and wine may make collectors’ hearts beat a little faster, but it’s classic cars that really set investors’ pulses racing. “They arguably capture the imagination more than anything else. The thrill of owning such visceral and often historic vehicles is hard to beat,” observes Andrew Shirley, Editor, Knight Frank Wealth Report.

The market for classic cars rose rapidly from 2012 to 2015 and some of the prices achieved at auction in 2016 were jaw-dropping. Standout sales include a 1957 Ferrari 335 Sport that sold for more than £24.7m and a Jaguar C-Type that achieved £5.75m. But it wasn’t always the prestige marques that made market headlines: a rare 1962 Citroën 2 CV Sahara fetched almost €192,000. Not bad for a car with just 425cc under the bonnet. However, in Q3 and Q4 the market levelled off – but this is likely to be just a ‘slow puncture’, according to market commentators.

Classic cars capture the imagination more than any luxury asset class. The thrill of owning such a visceral and often historic vehicle is hard to beat

Passion investments like classic cars can add diversity to a portfolio, but it would be unwise to rely on your collection of 1960s convertibles to underwrite your retirement. Many first-time buyers will fund the purchase with a windfall, an inheritance or a bonus; pleasure, rather than profit being the prime motivation.

The price of a classic car is determined by the scarcity of the model, its appearance, history and condition, as well as its roadworthiness, but the received wisdom is that you should ‘buy whatever puts the biggest smile on your face.’ The choice of car is likely to be very personal – you may be drawn to the makes and models you grew up with or lusted after once you’d passed your test. For Baby Boomers nostalgic for the Swinging Sixties, that might be the sinuous curves of a Jaguar E-type or an Aston Martin DB5 (007’s car in Goldfinger), while Generation X-ers might hanker after the razor-sharp styling of eighties cars like the Audi Quattro or Lamborghini Countach.

The upside to owning a classic car is that they are exempt from road tax (provided they were made before 1 January 1976); they are also exempt from CGT. But do bear in mind that older vehicles come with their own set of challenges: maintenance, insurance and storage all need to be factored in. And a classic car that needs serious restoration can become a major money pit. But for the true enthusiast, the sheer joy of ownership is likely to outweigh the financial cost.

Photography: Getty Images

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