Myths tend to linger in the face of uncomfortable truths about the value of investments.
Prior to the FSA’s creation in 1986, most investment sales were in the form of bonds. Very few intermediaries sold funds directly to the public. One of the old wives’ tales (or old asset managers’ tales) that persists from that era is: you don’t lose money unless you sell. The tale emanates from efforts to stop investors selling when markets fell. The sentiment is legitimate but that doesn’t justify porky pies.
Had your client invested at the high point of 2018, their initial portfolio of £100,000 would, at the time of writing, be worth just £96,592. This does not allow for charges, I should add. If you follow the old wives’ tale, you would argue that it is a loss only if you sell, implying that it is worth £100,000 still. Sorry – not true.
So let’s look at other periods. If you had invested that same £100,000 at the 1999 high (lots did), the current value would be £110,114. Had you invested at the low of 2002 (few did), the current value would be £190,384. Move forward to 2007 and the figure drops to £115,456.
So, how do you value portfolios if you argue that you lose only if you sell? At the level when invested? At their high point? Or at the current valuation? Being sensible, we’d accept the current value is the best indication of worth – acknowledging that it can change quickly, both up and down. This may be uncomfortable for a client after a fall but cannot be overcome by deceit. It is the nature of real asset investment.
The upside-down nature of markets over the past 25 years makes planning hard. Recognition of capacity for loss creates the need for certainty of income in the early years of decumulation, be it via partial annuitisation or a cash/short bond bucket. When a company valuation drops, does the chief executive say ‘Not to worry, it matters only if you sell’? He may, but his chair, his shareholders and the financial press will mock him. Business and commerce could not survive on such a ludicrous mantra. Neither can retail investment.
Naturally, there is justification in educating clients to ignore the daily ups and downs of markets. This means one should treat highs with the same contempt as lows. The market is not a one-way valve where you can lock in gains and continue to participate.
The answer, of course, is diversification, but it is not a doddle. And bonds are no longer seen as defensive stock for when equities tumble. Short government bonds return little or nothing today. Long bonds look expensive and risky with low levels of liquidity. Most market-insensitive investments are regarded as high risk and unsuitable for non-professional investors.
Most of the time, the right advice is ‘Don’t sell.’ However, if you gave that advice in 1973, when the market had fallen 15 per cent, you wouldn’t have looked too clever to your client when it continued to tumble until it had lost nearly three-quarters of its value.
Ultimately, there’s no easy answer. However, I’m a great believer in taking some money off the table when markets appear high and good profits have been made, especially as one gets older and will need to decumulate.
Clive Waller is managing director of CWC Research
Follow him on Twitter @clivewaller