Vanguard founder Jack Bogle was fond of saying that in uncertain times investors are best served by obeying the aphorism: don’t just do something. Stand there.
Right now, however, investors in the UK seem to have other ideas.
October alone saw £3.6bn in net outflows from equity funds, according to Calastone, while money market and fixed income funds attracted inflows.
We have seen similar signs of de-risking in our own data, with interest growing in our lower risk multi-asset funds.
Sitting still during periods of uncertainty feel unnatural. The instinct to do something kicks in even if that action undermines long-term goals
Why the sudden caution? There is no shortage of headlines to unsettle even seasoned investors.
Speculation around today’s Budget and guessing games over tax changes have not helped.
Add to that muttering on stretched tech valuations and apparent frothiness in US equities, and it is easy to see why nerves are fraying.
The key question, however, is whether those movements represent a measured response to circumstances, or a reaction that is principally driven by emotion.
Loss aversion
The behavioural finance literature is clear: humans are wired to avoid losses more than they seek gains.
Sitting still during periods of uncertainty feel unnatural. The instinct to do something kicks in even if that action undermines long-term goals.
Herd behaviour compounds the problem. When others are selling, or cashing out tax-free lump sums, it feels safer to follow the crowd, even when history suggests otherwise.
Of course, not every move is misguided.
If you are de-risking ahead of retirement, or a big purchase, now might be the right time.
But selling on rumour alone is rarely a good strategy for those pursuing a long-term plan, and the flows are substantial enough to suggest other factors at work.
Lessons from last year’s panic
After all, we have been here before.
Ahead of the 2024 Budget there was a surge in people withdrawing their pension tax-free lump sums, driven by fears of a tax change that never materialised.
Those decisions were not cost free.
Someone who withdrew a £50,000 tax-free lump sum from a £200,000 pension pot could have missed out on around 8 per cent tax-free growth (or £4,180) by holding the money in cash instead of keeping it invested for another year (assuming a higher rate taxpayer with a portfolio of 60 per cent equities and 40 per cent bonds).
Trying to second-guess politics is hard. Predicting markets is harder.
Nobody can see round corners, and even professional investors struggle to get it right.
Predictions of a correction in US equities have been made regularly for years. Yet valuations that look high can go higher.
Those who tried to call the top, time the market, or sit it out have missed out on substantial returns.
Since 1975, there have been more than 900 all time highs for the MSCI World index, more than 60 of them since the 2022 interest rate hikes.
Helping investors
The irony is that most investors know this.
In our experience many retail clients understand, at least intellectually, that success comes from having a plan, sticking to it and holding an appropriately diversified portfolio, for the long term, at a low cost.
The hard part, however, is execution.
Finance is a deeply personal issue, and fear, uncertainty and outside opinions can exert a powerful pull.
We recently surveyed 1,000 advised investors in the UK to ask about the kind of support they value most from their advisers.
A significant majority want help resisting decisions that could be counter-productive to their long-term financial goals — 82.7 per cent of investors value advisers who help them avoid reacting to every market movement, while 77.6 per cent value help in avoiding the urge to chase returns.
We asked the same group to estimate how much portfolio value could have been lost each year without their adviser’s intervention during the past three years.
On average, investors estimated an average annual loss of 12 per cent without their adviser’s intervention.
A single successful intervention can more than offset years of advisory fees.
Our own Advisers’ Alpha research, supported by other studies, concludes that behavioural coaching can reliably add 150-200 basis points a year to a UK client’s portfolio in net annualised returns, over the long term.
The research does suggest that this kind of coaching works best when the mindset has already been embedded.
If clients have already been educated on emotional biases and long-term discipline, and it is a part of regular client conversations even when markets are going up, it builds credibility and trust ahead of time.
Today’s Budget will bring more headlines about interest rates, economic growth and the importance of investing.
Next quarter, it will be something else — geopolitical tensions, corporate earnings, or inflation data. The reality is that markets have always lived with uncertainty.
Every decade has its own worries: the oil shocks of the 1970s, Black Monday in 1987, the dotcom bubble, the global financial crisis, Brexit and the pandemic.
Each felt like a turning point at the time. Yet, through all of these, disciplined investors who stayed invested were rewarded.
Markets move in cycles, and volatility is the price of admission for long-term growth.
The opportunity for advisers is to help clients see beyond the noise and focus on what they can control — costs, diversification and behaviour — rather than what they cannot.
As Bogle was also fond of reminding us, investing is simple but not easy. The hard part is patience.
So when the headlines shout “panic”, advisers do their clients a great service by reminding them to stay the course.
Doug Abbott is head of UK client group at Vanguard
