Our Perspective on 2020’s Returns
This is the third Collingbourne review of annual investment returns and 2020 definitely proved more … interesting than the previous couple. To borrow a footballing cliché, it was a game of two halves (from an investor’s perspective at least).
In 2018 we looked at whether those year’s negative returns were out of the ordinary and in 2019 we looked at ‘randomness’ of asset class returns. In the wake of 2020’s turbulence, we thought this time we would take a look at investor behaviour.
By complete chance last January, we published a blog and article on this very subject (which was published in the February edition of the Winchester Resident magazine). “A Tale of a Near Miss” told a story of one of our clients who almost sold out at the bottom of the market in the Great Financial Crisis in 2009 and how our emotions work against us when investing. This turned out to be rather prescient as in late February and March, we saw one of the fastest stock market collapses in history.
The emotional cycle of investing
We all, professionals included, struggle to separate our emotions from investment decisions. This works against us in the counter-intuitive world of investing.
Investors tend to go through an emotional cycle; optimism reigns as markets rise, leading to elation at their highs, giving way to nervousness as markets fall and fear at their lows. Everyone has heard of buy low, sell high, but their emotions lead to them doing the opposite.
This has happened for hundreds of years; we’ve seen it documented as early as the Dutch tulip bubble in the 17th century (counting casualties such as Isaac Newton). The most damage is done at market extremes, particularly selling out during a market crash.
How did investors do in 2020?
We can get an insight into the actions of investors by looking at the movement of money in and out of investment funds. A firm called Calastone produces a Fund Flow Index (FFI) which measures and reports on these flows of money. Their 2020 data provides some fascinating results.
Global stock markets started falling rapidly on the 20th February and in the final week of that month £1.55bn net was withdrawn from equity funds by UK investors. February 2020 became only the 4th month on record that saw net outflows of money from total fund assets.
March 2020 then promptly became the 5th with “the largest outflows on record by a long shot” (1). Equity funds actually saw small positive inflows in the 1st, 2nd and 4th weeks of March, however the 3rd week saw net outflows of £1.2bn. Almost all global equity markets bottomed out between the 16th and 23rd March, meaning all that £1.2bn got withdrawn pretty much at the bottom of the markets.
Those decisions to sell in the “fear” and “panic” stages of the emotional cycle of investing will have cost a lot of people a lot of money.
Thereafter equity funds mostly saw positive inflows for the remainder of the year. In this year of extremes, December 2020 saw a massive £2.4bn net flow into equity funds – the second highest month on record. This of course after most stock markets had long since recovered, with some (most noticeably the US) at record highs. The full emotional cycle completed within less than a year!
How did Collingbourne’s clients do?
We are happy (and a little proud) to say that not one of Collingbourne’s clients sold out during the market crash. Some naturally found it harder than others, but all eventually made it through unscathed.
In fact, we asked the majority of our clients to go one step further than just riding out the crash. We follow a policy of regularly “rebalancing” portfolios – resetting them to their target allocation. Following the sharp falls in equity markets, this required our clients to sell their safer assets that had maintained their value in order to buy the equities that had just fallen in value.
Only one client decided against following our advice to do this and one decided to partially do so – all other clients followed our advice to rebalance.
As such, every single one of Collingbourne’s clients avoided acting on the emotional cycle of investing (even if they felt it) and ended up with a positive return after all costs and charges in 2020.
Lessons
As we said at the time in March don’t put yourself through the stress of worrying about financial markets and be extremely wary about trying to second guess any market movements. Trust your investment plan and its process and think very carefully before attempting fixes in the storm. Focus on what is important AND what you can control.
Invest for the long term; hold a diversified portfolio, with a level of risk that is right for you and your circumstances. Stick with it and try not to worry about short term fluctuations in value. Markets reward investors for supplying their capital and funding ongoing human ingenuity and productivity over the long-term. The road maybe bumpy along the way but they’ve been there many times before.
(1). Calastone FFI April 2020: “COVID-19 CRUSHES MUTUAL FUNDS CAUSING RECORD OUTFLOWS AND A BOND ROUT, WHILE PASSIVE FUNDS SEE RECORD INFLOWS”
Disclaimer:
Investment charts sourced from Financial Express Analytics: Gross Total Returns, all income reinvested, GBP terms. Returns are based on market indices, representing individual asset classes. Indices are not available for direct investment and take no account of any costs or individual tax liabilities, that must be occurred when investing, which reduce net returns. These figures are provided for information purposes only.
This document should not be considered a recommendation to purchase or sell any particular investment. Care has been taken to ensure the accuracy of content, but no responsibility is accepted for any errors or omissions. We do not predict or guarantee the future performance of any individual security, investment, portfolio or asset class.
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