“Events dear boy, events” was the reply ex-Prime Minister Harold Macmillan gave when asked what might unsettle him. The phase could just as equally be uttered in answer to what affects the stockmarket.
Indeed, since the 2008 financial crisis it has been events that have constantly worried and undermined any investment. Markets have been rocked by uncertainty over when interest rates will rise, the Scottish referendum, Brexit, slowing growth in China, the commodity price rout… I could go on.
These events provide ample material for thousands of financial journalists. Meanwhile, the internet has caused an almost insatiable appetite for content. The surge of available information in recent years reminds me of the birth of satellite television. At the time, people loved the idea of hundreds of channels, not giving any thought to the quality of what would be provided. As we all know now, though, most television programmes are rubbish. In reality, dross is all around us.
The events of the past few years are just what the internet needs to sustain the demand for content. Financial deadlines appear to be a favourite, with headlines such as “six weeks to save the euro”, “Greece decision looms” or “Scottish referendum decision tomorrow” attracting the most readers. This year is no different, with the countdown to a decision on Brexit and the US presidential election dominating column inches.
While these events are good for writers scratching around for the next story, it is the precise opposite of what investors need. Over the long term, these events have very little effect on a portfolio and an investor is often best off doing nothing. Yet a constant barrage of information can mean an investor is chopping and changing their portfolio on a regular basis – a recipe for disaster.
That is not to say these events do not matter: they are likely to shape the future. However, it is far easier to interpret their impact with the benefit of hindsight. Brexit, for example, could lead sterling to strengthen or weaken; it could mean the shares of domestically-focused companies fly or fall. Attempting to position a portfolio in advance to benefit from the eventual outcome is almost impossible to get right.
Yet time and again I see reports suggesting asset allocation counts for around 90 per cent of portfolio returns. Unsurprisingly, this old chestnut is usually bandied around by those managing passive portfolios. With the level of noise surrounding any event of note, it seems asset allocation decisions are more often made by the heart than the mind. Most asset allocations go horribly wrong because they are emotional, rather than practical, choices. The majority of the time, stockmarkets are in no-man’s land. They could just as easily rise 20 per cent as fall by 20 per cent, and no one really knows which. Asset allocation decisions made in these times are closer to gambling than investing.
That said, once or twice in a decade, a sector, region or area becomes either ludicrously expensive or very, very cheap. This is when an asset allocator can really earn their stripes. For example, during 2009-2012, Japanese stocks were dramatically undervalued. Investors who took advantage of the opportunity to buy these stocks at a discount have been handsomely rewarded.
But tinkering with a portfolio over events such as Brexit or the US election when, in reality, it is impossible to judge how the market might respond is daft. Analysis of stockmarket performance following past general elections, and even the Scottish referendum, shows investors who did nothing would have been better off than the majority of investors who attempted to time the market.
The huge influx of content has made investment decisions harder rather than easier and dramatically increases the temptation to make changes. Investors with the best performing portfolios, like many of the best active fund managers, have extremely low turnover and tend to block out the noise and focus on the long term.
Mark Dampier is head of research at Hargreaves Lansdown