The first half of 2022 will go down in the history books as a demi ‘annus horribilis’ for investors. 

    With the global stock and bond markets returning -10.7%1 and -4.0%2 respectively, the healthy post-pandemic economic rebound which was meant to propel the markets forward has not properly materialised. Things have not gone according to the script.

    But then life rarely does. Whether it be career, family, or relationships, our best-laid plans usually take some deviation from the set course. Understandably, that can feel uncomfortable, disorientating, painful even. 

    After the turbulence of the past six months, investors sitting on losses may be fearful as to what the future holds. They may also be contemplating what action to take to ensure they are best positioned moving forward.

    Sadly, nobody can be entirely sure how tomorrow will play out, your author is most definitely included. Yet there is timeless guidance in keeping one key insight in mind: investing well is about managing one’s emotions. That is what makes it such an interesting field.

    Imparting the following principles to worried clients, as applicable to many aspects of life as to the markets, may be helpful

    Strong feelings can lead you to act rashly. Slow down.

    Panic, confusion, and fear are rarely trustworthy companions when it comes to sound decision making. If developments in the markets are causing alarm, sleep on things before making any hasty decisions. Remember: just as there is never any reason to rush into the markets, nobody should feel pressured to rush out of them either.

    Nothing in life is guaranteed. Expect surprises.

    Anyone believing markets behave rationally at all times should think about what sits behind the mountains of numbers, charts, and analysis that swirl around nowadays. At root, markets act as an aggregation of the fancies and fears of millions of flawed human beings. It should come as no surprise that, from time to time, some of the less useful human emotions make their presence felt, leading to volatility and sharp sell-offs. Yet neither underlying value nor financial realities ever disappear, meaning that cooler heads are highly likely to prevail in the fullness of time.

    Always find the silver linings

    On suffering a setback in life, it can be all too easy to dwell on the negatives. Yet taking a more constructive attitude can pay off if it stops one throwing in the towel on an endeavour that has long-term potential. So is it possible to find upsides even in this year’s dismal market returns? There is reason to think so:

    • Most simply, regular savers or those with lump sums to invest at this juncture now have the opportunity to buy at lower prices.
    • The reduction in equity valuations, particularly among fashionable growth stocks and sectors, has been agonising. However, these have now been reset at more rational, sustainable levels going forward. In a healthy market it’s earnings growth, not multiple expansion, which should do the heavy lifting. Companies now have an opportunity to focus on making this happen without the threat of multiple contraction hanging over their operations.
    • The fall in equity and bond prices represents a tightening of financial conditions in its own right. This reduces the need for central banks to have to raise interest rates as much as they otherwise would, which would damage both asset prices and the real economy.
    • Now that dividend and bond yields have risen, it has become easier to invest both for clients seeking income and for those with modest risk profiles. Both have been a challenge in recent years.  
    • Large deficits in corporate defined benefit pension schemes were a persistent background concern throughout the last decade. Yet these have been transformed by the emergence of higher yields. UK DB schemes are now almost fully funded once more, freeing up capital for dividend payments, for buybacks or for value-accretive reinvestment.

    Distressing as the sell-off this year has been, it has not brought only bad news. Looking on the bright side is always a frame of mind worth adopting.

    Learning these lessons and fighting some of these impulses, is hard. Many of them are informed by no less than the very building blocks of human nature. That goes a long way to explaining why although investing is simple, it is by no means easy.

    Next time we will consider a few more tips which might help investors learn to live with the capital markets and the uncertainties they bring.

    1 MSCI All Country World Index, gross return 1 January 2022 – 30 June 2022 in Sterling terms.
    2 Bloomberg Global Aggregate index, gross return 1 January 2022 – 30 June 2022 in Sterling terms.
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