Staying at home: an unforgettable year

What you’ll learn:

• In times of extreme uncertainty and stress, investors are easily driven more by emotion and less by fundamentals.
• Why timing the market requires levels of confidence that are almost always unwarranted and also unhuman stores of emotional resilience.
• Why we believe our approach of a stable long-term view with small tactical adjustments will adequately reward long-term investors for the level of risk taken.

A year ago this week was arguably when the fear about the coronavirus pandemic and uncertainty felt at its peak. Prime Minister Boris Johnson announced the first UK lockdown, where we were told to stay at home for all but essential reasons. We passed 400,000 cases recorded globally, with infection rates rising outside Asia, resulting in exponential growth in cases in the UK and Europe. Google searches for ‘recession’ topped levels seen during the Great Financial Crisis. Panic buying had cleared many supermarket shelves of essential food and hygiene products.

If there is one thing we have little doubt about it’s that investment markets, or the people who make them, don’t react well to uncertainty. Most investors don’t need reminding that the markets had fallen rapidly, unlike anything we had seen for over a decade.

Lead us not into temptation

It is understandable that over this period many long-term investors were wondering if they should sell up and try and wait out the onslaught. In order to understand why we remained confident in our long-term asset allocation approach we need to look at how markets and our own psychology interact.

Zone of anxiety

In times of extreme uncertainty and stress we tend to see our emotions and natural biases come to the fore. In the cold light of day, it is easy to see how, in seeking certainty, we often project our recent past experience into the future. In the case of the pandemic, this means thinking about the marked growth rates of the virus and the worsening news for the economy into the future. This bias leads us to ignore the impact of future changes and easily leads to an overly pessimistic view.

Alongside this, we also tend to give too much thought to the likelihood of extreme outcomes, even though by definition they are very unlikely. The immediate personal health and financial impact of the virus meant that the risks were very salient making extreme outcomes feel more tangible and magnifying the effect. This was borne out as markets appeared to be reflecting a strong likelihood that the worst-case scenarios would come to pass, and market sentiment was at extremely depressed levels.

Buying the dip

During these moments investors are easily driven more by emotion and less by fundamentals, so they become more sensitive to new information and news sentiment. This means significant shifts can happen very quickly and are impossible to predict with any accuracy. Whilst pulling out of the market might feel obvious, by the time you are reacting to the news it is already likely reflected in prices and thus a sharp rebound could also occur.

Timing the market requires levels of confidence that are almost always unwarranted and also unhuman stores of emotional resilience. Imagine you did manage to sell during the first part of markets falling, you then have to time entry back into the market.

When do you get back in? With hindsight, it may make the decision seem more obvious than it ever would have been. The best time, by definition, is near the bottom of the market which is also the most difficult. Imagine putting significant amounts of your money into investments when the opening paragraph of a headline story contains the words: rocked, panic, forced-selling, loss-of-faith and crisis¹. This is what faced us at the troughs of the market – it is easy to forget that.

The news didn’t get materially better until after markets had recovered substantially and thus in waiting for confidence that a further fall wasn’t imminent you easily could have seen the markets come back past where you left them.

Lessons learned

As a long-term investor you are trying to take advantage of the time horizon you have and the long-term trends in capital markets. Weathering these very periods is why you may be rewarded in the long term.

We continue to believe our approach of a stable long-term view with small tactical adjustments, to try and take advantage of those periods when we do see opportunity, will adequately reward long-term investors for the level of risk taken. It’s thanks to this approach, and the successes of our adjustments, that if you had invested in our moderate risk Global Markets fund (the Barclays Wealth Global Markets 3) at the start of 2020 and fallen asleep for a year, you would have woken up with 8.25%² more, a healthy return. Note that past performance is not a reliable guide to future performance. We should also point out that a single year is still too short a time frame to judge long-term portfolios, coincidentally though this is very close to the 5-year return of 8.7%.

Was it tempting to try and avoid more of the downturn, yes, but is it worth taking an emotionally-laden gamble with the odds stacked against you, we don’t believe so.

Barclays Wealth Global Markets 3 discrete 5-year performance

Source: Barclays

Past performance is not a reliable guide to future performance.

Where to invest

To diversify your investment, you may like to consider our own Barclays Ready-made Investments (RMI). The RMI are just one example of a range of diversified funds which allow you to select the level of risk you are most comfortable with. These multi-asset funds invest in passive funds across a range of asset classes and regions, offering a globally diversified one-stop solution for investors. Ready-made Investments are not the only funds that we offer and they won’t be appropriate for everyone.

These are our current opinions but the future, as ever, is uncertain and outcomes may differ. Past performance of the fund and its manager are not a reliable indicator of their future performance.

We don’t offer personal investment advice so if you’re unsure you should seek that independently. 

Funds are designed for the long term so you should only consider them if you can stay invested for at least five years.

Read the Assessment of Value report [PDF, 683KB] for funds run by Barclays.