“Looka dat, looka dat….”
by Doug Brodie
“Hello, ev'ryone, This is your Action News reporter with all the news that is news across the nation on the scene at the supermarket. There seems to have been some disturbance here. Pardon me, sir, did you see what happened?”
“Yeah, I did…”
You might remember 1974’s music as the year of ‘Rebel, Rebel’ from the late David Bowie. Paul McCartney released both ‘Jet’ and ‘Band on the Run’. We also had the sublime “You Are Everything” from Diana Ross & Marvin Gaye, and ‘Annie’s Song’ from John Denver.
In fact I might suggest that for a late baby boomer the year 1974 is definitely an option for the best year of music of our generation: click here, let me know what if you agree https://bit.ly/3M5vnYe.
Irrespective of those gems from Queen, Bowie, The Stones, David Cassidy, Clapton and Cockney Rebel, along pops Ray Stevens with his song ‘The Streak’ – it reached number one in the UK, the US, Canada and New Zealand.
If you looked at the UK charts only in February ’74, you’d be excused for believing the quality of music in that year was – hmmm – odd. If you viewed 1974’s music by the best-selling albums for the whole year you’d have a completely different view: 1) The Carpenters Singles, 2) Band on the Run and 3) Tubular Bells 45) Elvis Presley 40 Greatest and 5) Dark Side of the Moon.
The point
Look at these two investment charts:
Both charts show the FTSE100, both show 1st January 2020 to 1st January 2023. Clearly the first chart is more volatile – in fact its standard deviation is measured at 20.16.
The second chart has a volatility measure of 15, yet it’s exactly the same index.
More – compare these two charts of the FTSE100 from 2020 to 2023:
The amount of anxiety that investor (you) has with their investments is directly proportional to the amount of observations of the investment. There are 249 trading days per year on the London stock exchange, over the last twenty years the average daily change of the FTSE was 0.45% - PER DAY – so you’d get dizzy trying to follow the figures. However, looking at the same index over the twenty-year period the investor sees an average annual return of 7.7%.
Investors make this mistake all the time: traders need to follow prices throughout the day, investors don’t, and if you do, you’ll end up very stressed and (probably) making errors. The question we ask when clients talk to us about this is ‘what would you do when you look at your pension and see its down 1% on a day?’ The answer is always ‘nothing’, so you must not do so.
I labour this because we have seen this lead to extremes twice in the last ten years:
Just before the Brexit vote in 2016 a wealthy lawyer returning to the UK from overseas became a client, having not ever previously worked with a planning firm and needing professional advice in managing his retirement.
We ‘tip-toed’ over the uncertainty of Brexit, using near cash investments for half the money, until the future became clearer for all. As the market tanked following the vote, so did the investors’ recoding of his values and after four weeks he sold all and crystallised a loss of over £200,000 at a time he could least afford to.
And even worse:
An investor in his 40’s had his life changed when his employer sold the company, and the investor received a large sum … but had his salary cut to a minimal level as part of the deal. He didn’t have quite enough capital to stop work (he had teenage kids), so he was worried about his capital. When the pandemic hit his employer’s business was required to close, and the client started to panic.
After a month of the pandemic the client requested a portfolio valuation to be emailed to him every day. Despite our best advice and explanation, he insisted, and eventually he imploded, probably on the verge of a breakdown caused by financial insecurity worrying about whether China would ever re-open for business and whether planet earth would survive, and he convinced himself this was the end of capitalism as we knew it. He sold to cash crystallising a loss of over £400,000, and although he doesn’t know it by the end of that year his portfolio was back in profit. Of course, all the income that we had invested for continued to be paid throughout the pandemic.
If you’ve never worked with a financial planning firm before then these two examples demonstrate a material part of our work for you. When that temptation to daily track your money becomes embedded, we are the people who will talk you through the addiction and guide you back to relaxing with money. After all, if you’re 60, you’ll have on average another 6,972 trading days that your money will moving up and down. Remember, the income and capital values are not correlated, the income solution we provide to investors is very deliberately manufactured to defeat that anxiety.
In the year of Dark Side of the Moon and Tubular Bells you don’t want to have ‘The Streak’ taking pride of place in your music collection.
Doug