Last year was certainly full of surprises. If only I’d had the foresight to bet a pound on my football team Leicester City to win the Premier League, the UK to vote to leave the EU and Donald Trump to claim victory at the US elections, I would be able to retire.
Yet despite our inability to predict the future, some advisers are gambling much more than a pound, with many intent on making big bets with their clients’ money (and future) in trying to time the market.
Last January, Royal Bank of Scotland caused panic by warning we faced a “cataclysmic year” and advised clients to “sell everything”. Yes, the same RBS that had to be bailed out by the UK taxpayer during the banking crisis. Safe to say I chose to ignore their “expert” opinion.
Regardless of your politics, most would agree it was shocking year in terms of election results. But it was not in terms of investment returns.
While the markets did fall slightly at the start of the year, it was nothing like the cataclysmic 12 months predicted by RBS.
Provided you ignored the bank’s “advice”, the average investor (taken as the average Mixed Investment 40-85% Shares retail unit trust/Oeic return) would have finished the year approximately 16 per cent up.
“Despite our inability to predict the future, some advisers are gambling much more than a pound, with many intent on making big bets with their clients’ money (and future) in trying to time the market.”
Tough decisions ahead
To be fair to RBS, it is not alone in predictions of doom or attempts to time the market. Last year, I wrote of the “fool’s errand of market timing” and one IFA who advised all his clients to switch half into cash the morning after the Brexit vote.
Naturally, he would have fared no better than RBS with his market timing. By switching 50 per cent to cash, the average investor (his clients) would have missed 12 per cent growth since the referendum. If he at least had the good sense to keep the other 50 per cent invested, his clients would still be 6 per cent worse off as a result of his advice.
He and his clients would now face a difficult choice. Do they hold out in hope of a significant market fall so they can reinvest at a lower point than they left it?
I suspect when (or if) this fall comes, they may miss their opportunity, as investing will look even scarier. So do they admit their mistake and bite the bullet by reinvesting today and effectively realising that 6 per cent loss?
Whether it is just that the market has gone up for “x” number of years, or that it is over-valued by a particular metric, there will always be someone claiming it is best to switch to cash. Occasionally, they may even be correct. After all, even a stopped clock is correct twice a day. In the long run, though, it is surely a losing strategy.
To be clear, I do not claim to have known the market would finish 2016 significantly higher. Nor do I claim to know it will not crash in 2017. But I do know markets tend to rise over time and, if I have to bet, I would rather bet with it than against it.
Scott Gallacher is director of Rowley Turton