The significance of spending time in the market

Welcome to Word on the Street's Personal Finance podcast from Barclays UK where our experts share their knowledge and insights to help you become a better and more confident investor. In this sixth episode of our Word on the Street Personal Finance series, we discuss what is often the most difficult part of investing: sticking with your investment plan and established financial goals, especially during periods of uncertainty.

PHIL ATTREED: Hello and thank you for joining us for this the sixth episode of our Word on The Street Personal Finance series. In this episode, we’ll be focusing on the importance of remaining invested and committed to an investment plan throughout difficult news events – this is something we have certainly seen plenty of in recent times. Having considered your propensity to save and invest, established your financial goals, understood the need to take some risk and taken the first often difficult steps to getting invested, often the most difficult part of investing is executing the plan and sticking with it. I’m Phil Attreed, Barclays Head of Investment Consulting and for this episode I’m joined once again by Rob Smith, our Head of Behavioural Finance and Alina Lobacheva, Senior Portfolio Manager who will hopefully share some of their experiences and tips for staying invested. Alina, could you share an example or two of common client responses to periods where news headlines maybe grab our attention and can even make us doubt our convictions to be invested?

ALINA LOBACHEVA: Thanks Phil, I think it's quite interesting that we're talking specifically about newsflow here, because sometimes in an attempt to attract more views news agencies gravely over-sensationalise fairly benign, isolated or frankly short-lived market events, so in some cases, investors are led to believe that things are much worse than they really are. The other thing to bear in mind is that headlines tend to focus on very specific events or market moves that have already occurred, and of course that may have little relevance in the context of a diversified portfolio or forward-looking investment decisions. So with that in mind, the two most common responses to negative newsflow that we hear about are really to either sell all existing investments or delay making investment decisions altogether, opting to hold cash instead. Now you know both of these reactions are completely understandable, but the reality is that they may result in a decrease in the value of an investment over the long term. So even when negative press is justified it's actually impossible to accurately time market falls and subsequent recoveries, so investors really risk selling too early and sometimes that's years too early, and buying too late or not reinvesting at all. Of course as you can imagine it's very difficult to invest subsequently after you've decided that the market level is not appropriate before.

PA: So Rob, I guess I’ll come to you now, what behavioural traits are we observing here? It feels as if what Alina is describing are some perfectly rational responses? 

ROB SMITH: As you say, it does feel like they're perfectly rational responses because if you're in a situation which makes you feel anxious then it's perfectly rational to remove yourself from that situation. In this particular situation we're talking about, sadly for investors, whether it's selling or delaying getting invested as Alina mentioned, the cost that reaction can be quite significant. Now it's common for us to see bad news about the direction of the economy, or the recent market moves or some similar negative news, and project that out into the future and simply assume that this is going to have an impact on your investments and be panicked by that. So, that said, obviously people react quite differently and it's important as an investor you try to understand how nervous any bad news or fall in the markets may make you feel, and it’s likely effect on your behaviour and the things you're going to want to do in that situation before you get invested because then you can build your portfolio and your framework for investing with that in mind. Understanding what we call our financial personality, so how our emotions are going to affect our decision making throughout the investing journey, is at the core of the work our team does here at Barclays. Now how news and experience of market turbulence will likely affect your emotions and behaviour is key and it's something that we measure and have been measuring for clients we give advice to for almost a decade, and we call it composure.

PA: So is it also the case that investment professionals suffer these same biases or traits, as their investors. I’ve talked about my own lower levels of composure in a previous episode so I can certainly identify with them.

RS: Yes of course and dare I say, sometimes finance professionals can exhibit these traits and behaviours more than non-professionals, often precisely because they feel they should be impervious to them as professionals. Now you know composure is one, and I'm sure there are many investors who suffer from composure and that may have an effect on their decisions which they're not necessarily aware of, or they can very easily rationalize them in a way. I think probably a better example maybe something like overconfidence, where often people expect investment professionals to have more foresight than is potentially possible, so it's very easy for them to try and meet this expectation. And I guess from our experience there's also some selection bias here is that the finance industry tends to attract and then reward those with high confidence and possibly overconfidence. An important point is that behaviour traits are not binary, and biases affect us all, just to different extents. So research shows that being educated, or a finance professional doesn't necessarily protect you from this, in fact there are many studies that have been done on professionals and fund managers, and other finance professionals that show they're just as susceptible to this as others. This is why it's really important that you look for professionals who understand the importance of managing emotions and the effect that emotions have in the investment decision making process in order to recognize their own behavioural weaknesses and strengths.

PA: So coming back to you Alina, how do you overcome these personal concerns or traits yourself. what do you focus on as a portfolio manager? You're responsible for hundreds of millions of pounds of client money, what do you focus on? 

AL: That's a great question and like Rob mentioned previously, like all human beings’ investment professionals are by no means immune to behavioural biases, and you may remember at the start of 2016 an RBS analyst suggested selling everything except high quality bonds, and at the time he was talking about a cataclysmic year with stock markets down up to 20%. And of course this was immediately picked up by the press and then that triggered calls from worried clients. So in that kind of situation it's very easy to start questioning yourself and your views, especially as this was an another investment professional expressing concerns. Now if you followed that recommendation in 2016 you would have lost out on returns not only that year, but quite possibly in subsequent years because of course seeing markets rise when you're expecting a cataclysmic event, would have made it very difficult to commit to investing. So as investment professionals we really have to stay focused and remind ourselves and our clients of a few really important things. Now first of all, markets and especially stock markets are inherently volatile, so it's normal for occasional sell-offs to occur. Now most of these are unpredictable, at times irrational and often short-lived, there's no free lunch so to speak, you can't earn a return without taking on any risk. So we must maintain composure and look at macroeconomic indicators as opposed to just news headlines before making investment decisions. Now there have been many times when I've opened a headline that reads the market is in free fall, only to then check our systems and realize it's only down a few percentage points.

PA: That’s a great point Alina, one of my biggest frustrations is the reckless use of language to dramatise frankly unimportant news events and as I’ve mentioned before I always look for opposing news reports or simply ask myself so what before considering any action? What else do you focus on?

AL: So the second thing that's really important to keep in mind is the focus on your long term goals and creating value over the long term. Because the long-term is driven by macroeconomic and structural behavioural trends, whereas the short term tends to be driven by sentiment and newsflow. So by the time you see the negative news the market would have already reacted, similarly by the time positive headlines appear the market would have already moved higher, so this is why we always say that timing the market isn't possible, it's time in the market that matters. Having an investment plan and sticking to it unless personal circumstances or long-term trends change is really the best thing to do to avoid being distracted by short-term noise. So lastly we maintain diversified portfolios at all times, John Maynard Keynes famously said that 'markets can remain irrational longer than you can stay solvent', and that's very true. So no matter how thought through and thorough your analysis is, without sufficient diversification you're more likely to lose everything before eventually being proven right, and this doesn't mean you can't express your views of course. Falling markets may provide opportunities to buy desired investments at a more attractive price, for example we may add to equities during weak markets if we believe the long-term macroeconomic outlook is still favourable, but we would only add a few % at a time rather than selling everything for example, and moving a 100% into stocks. Why, because as I highlighted in my previous point, no one knows when the market will stop falling, we can only know that this price is relatively attractive in the context of a long-term investment horizon, and that when or if a recovery does occur we will capture the upside. The worst and best days in the market tend to be clustered together.

PA: That's very sound advice Alina, and wise quote in there from Keynes as well. Rob do you have anything further to add that our listeners can take from the work that you do with the investment teams on a professional basis, so colleagues like Alina?

RS: The thing I'd say is and I think Alina's kind of hinted it through what she's been saying, is so it's all about having a process and some rules as well, that are well considered and designed in a what I'd call a calm environment. So just as if you ran an airline you'd have your emergency procedures figured out before you take off, as an investor you should have your plan of your emergency procedures if you like, how you're going to react before you start investing. So only thinking about what to do in the midst of some significant market turmoil is going to be really difficult because it's going to be when you're most susceptible to lots of behavioural and emotional pitfalls that we see. So one example is to force yourself to consider the other side of an argument and seek out views that support it. I know you mentioned this before Phil, so if for example you think that a no deal Brexit is going to lead to the UK stock market falling, and a negative impact on your investments, possibly because you personally think Brexit is a bad idea, go look for some different views and force yourself to consider those different views and how they may also play out in the future. The other thing that I've mentioned before is just to be aware of how important managing those emotions is for investors, and try to understand and plan for what your reactions may be. So a tangible example here is having a cool off period, so that means enforcing yourself to wait a period of time, maybe sleep on it overnight before making that decision to buy or to sell. And no long-term investor can't delay a decision by a day, and it may be that the emotional response is reduced, or the trigger that's kind of creating that response has passed.

PA: And so following on from that Alina, how do you go about reassuring clients in challenging market environments? You must get quite a lot of varied enquiries? 

AL: Yes, that's true Phil, and actually clients may become worried not only during difficult times but also when markets are rising. So for example when news headlines talk about peak valuations, or market indices climbing new highs when the economy is perceived to be struggling, in both of these cases we remind clients about the diversified nature of their portfolios. The makeup of a client portfolio will be meaningfully different from the specific isolated market discussed in the press, and clients are actually often surprised to learn that an event they read about had limited impact on the performance of their portfolio. The second point I often make relates to focusing on the bigger picture, despite falling markets or negative headlines the economy may still be doing just fine, and there may be ample support still offered by governments and central banks which of course suggests the situation should reverse. At the same time news articles about high valuations may be misleading because for some companies higher valuations are justified. For example, large technology companies that make up a significant proportion of the US market have continued to demonstrate strong financial performance despite the fact that there are broader coronavirus-related issues. Finally, at times the environment really is challenging, but even then it's important to focus on the long term and keep sight of your goals. There's absolutely no evidence to suggest that timing the market is possible, so by acting on pessimism all you're likely to do is crystallise a loss and then miss the recovery going back in at a higher level. Markets move really quickly, so by the time you see something in the press it's already too late. Aside from fund managers with significant access to information and expertise you're also competing with artificial intelligence, and these are machines that trade automatically on news flow or trends. So really to benefit from the power of compounding, no matter how difficult it is you need to sit tight and maintain composure. 

PA: Thanks Alina. And Rob, when news flow makes us nervous what would you suggest clients focus on to get more comfortable, particularly for those who might not have access to an investment or financial advisor to call in order to get some reassurance?

RS: So the first thing I'll suggest is to try and mentally disconnect the news from your investments, so as you just heard Alina say, the contents of our news feeds or the news that we're reading and seeing, is unlikely to have a material impact on your portfolio especially if you're in a diversified portfolio, as markets are forward-looking and often that negative news you've just heard about is already being factored into the to the market and the prices are reflecting it. Now that sounds very easy to do, in reality it's always a little bit harder to do that. I think one of the big things you can try and stop yourself from doing is whenever you're reading negative economic or financial news is to avoid the urge to go and then look at your investments, because the likelihood is you may see in the short-term a negative reaction, but that doesn't necessarily tell you anything about the long-term trends as Alina has been mentioning. So the other point I'd make is make sure that the news you're digesting is reliable and trusted, news will often be designed to grab our attention, again as Alina mentioned right at the beginning. But some news outlets tend to stick closer to the facts than others, I mentioned before that getting a balanced view is really important, the thing to note here is that we tend to look for, and trust news that supports our existing world and investment views, so it's important to realize that and therefore try and force ourselves to get a bit more of a balanced view. The last point I'd make on when we're digesting that news is be aware of those purporting to have lots of confidence in their views of future events, as we know this year has shown us more than any the future in markets and in the economy, as with any other area of our lives is often very difficult to predict, and if you listen to our sister podcast you would have heard Will Hobbs our Chief Investment Officer talk at length about how difficult that is, and how we should be a bit wary of those talking heads who seem to have a lot of omnipotence.

PA: Thanks Rob that absolutely makes sense, and a good plug in there as well for our weekly podcast that we'd obviously encourage our listeners for this Personal Finance series to dial into, where we cover current news stories and market movements on a weekly basis, and hopefully that helps some of those investors find a little bit of the signal in amongst some of the noise. So let's finally just finish with a few broader tips for our listeners to take away, Rob let's start with you.

RS: The first thing I'd say is to try and tune out short-term market noise as much as possible, that means not checking your investments every day, single daily price change is irrelevant to a long-term investor. So it may be that you almost diarise when you're going to check your investment portfolio, maybe on a quarterly basis or however often, just to make sure it's still appropriate for you. And I'd also say on that point that if you're if investing for yourself especially online through different platforms, set the return periods that you see for your portfolio to the longest possible time frame because those tend to be defaulted to a daily return which is not going to help how you perceive the risk of those investments. The second point would be to think bigger picture and long term, and as I said before, it's easy to say but to use a comparison to try and bring to life a little bit is to think about your portfolio as a garden, so you do the hard work sort of preparing the soil, working out the best flowers to plant for the conditions that you have, and then once you've done that you know you just need to tend, you need to water it, you need to let the weather come and go as it will, but not necessarily dig up your entire garden because you have a brief storm that passes. So make sure your portfolio is well diversified and has the right risk level, and then don't engage too much with it, even if those inevitable storms do come.

PA: Thanks Rob and turning to you Alina, a couple of tips from you.

AL: Sure, I think the first thing to remember is you need to stay calm during periods of market volatility and stay invested. This is of course very difficult to do but just remember that the portfolio is more robust than you may think. I think second of all, remember that a diversified portfolio like the ones I manage shouldn't be moving around as much as news headlines may lead you to believe. As we've talked about before, news headlines are specifically designed to grab your attention and elicit a reaction, don't let these distract you from the long-term reasons behind investing. Finally, have a plan in place and don't tinker with your portfolio unless you have a good reason to, for example, your circumstances or goals have changed. If your portfolio is managed by investment specialists, rest assured that they will be making adjustments as market conditions and macroeconomic indicators evolve.

RS: If I can just jump in there Phil, I think that's a really good point that Alina makes, the key action for investors should be to regularly check that your portfolio is consistent with your goals and if this is being done anyway, and it's being done for you then there should be no need for action when markets or news gets choppy.

PA: That's great, thank you both. And just to add a couple of tips in there from myself. Firstly, I'd encourage investors don't get too hooked into news narrative on stock performance as Alina's mentioned, it's largely already going to be in the price, and markets tend to recover much quicker than news flow as investors are often forward-looking, something that Will Hobbs our Chief Investment Officer is often keen to state. And secondly when it comes to our UK investors, just a quick comment around UK news, if you're in a globally diversified portfolio which most of our investment portfolios that we at Barclays run on behalf of our clients are, then actually UK news can be quite insignificant. Remember there's a lot of good stuff going on out there in the world, even if news closer to home is a little bit less positive, and a great example here is actually post the Covid crisis with US companies and US stock markets faring much better than other areas globally, and in particular those tech companies doing much better off the back of the newsflow and the benefits that they were driving for from that period. One final takeaway is that when invested in managed funds or diversified portfolios where I'm paying investment specialists to manage the investment for me, it's important to remember that they do have the tools that Alina's referenced, they have the depth of team expertise there to make the decisions for you and really to rely on them to manage through those periods of uncertainty.

Rob, Alina thank you both for joining me once again. Thank you also our listeners, hopefully again some thought-provoking insights in there for you today, and as always you can listen to our regular Friday podcasts on the latest market and investment thinking and we'll be back soon with the next episode in our Personal Finance series.