In 2020, the Saunderson House approach was to use the market falls in the early stages of the Covid-19 pandemic to buy equities, at what we deemed to be very cheap prices, using cash and bonds in client portfolios.
The timing of these three equity purchases was broadly the third week of February, March and May 2020. Globally, the bottom of the equity market indices was 23 March 2020.
Today, we wish to understand how our work as investment managers in 2020 compared to what many other investors might have been doing over the same period by looking at three different scenarios.
To this end, we have created three fictional private investors: (i) the ‘head in the sand ostrich’; (ii) the ‘run for the hills antelope’; and (iii) the ‘take it on tiger’. We have used the end of March as a point at which these investors made their decision, to either (i) do nothing, (ii) sell out of the markets, or (iii) buy more equities, respectively.
With the benefit of hindsight, we know that Investor Three – the Tiger – should have been the most successful in 2020, but we wished to understand how the numbers compared.
Each investor starts with a 50% / 50% equity / bond portfolio at the start of 2020.
On 31 March 2020:
1. The Ostrich deems that the best option is to do nothing. Perhaps they thought that markets should recover, but the infection rates in the UK were rising exponentially, so taking action would have been too risky a move for them. The thinking is maybe ‘leave invested what I have, but don’t take more risk because there is still too much uncertainty’.
2. The Antelope has seen markets bounce from their 23 March low. Having missed their opportunity to sell out when markets were in free-fall over February and March, they decide to take the opportunity of a small market bounce to de-risk and protect themselves from further market disruption. Therefore, they sell half of their equity allocation to buy bonds on 31 March.
3. The Tiger decides that markets have been oversold and thus represent a buying opportunity.
It’s a very uncomfortable decision to make, and feels contrary to what they are seeing happening around them, with many more weeks of lockdowns and uncertainty ahead. However, they have seen a small recovery from 23 March and decide it is the start of something good – so they sell down 50% of their bond allocation to buy more equities on 31 March.
We know from hindsight that the Tiger took the best approach, but how much better did they fare over calendar year 2020?
Worth noting is that global bonds returned c5.4% over 2020, while global equities returned c12.7% (as represented by an HSBC Global Government Bond tracker and an HSBC FTSE All World Equity tracker, respectively).
1. As can be calculated from the above numbers, the Ostrich achieved an average of the two funds, so c9% for the year. Not a bad result all things considered.
2. The Antelope’s market timing on the switch is very unfortunate, and the panic-induced sale means they returned just 3.2% for the year, so worse than both funds.
3. The Tiger’s strategy is well-timed and leads to a return of c17.9% for the calendar year (see chart below) – almost 50% more than the equity market tracker for the year, and almost double the return achieved by the Ostrich’s portfolio over the same period.
Many of us have heard the investing maxim – be brave when others are fearful and fearful when others are brave.
The key problem with this maxim is that it’s easy in hindsight, but doing the opposite of what one feels one should be doing at the right time is very uncomfortable.
In other words, the inclination to sell when markets have taken a tumble feels upsetting but completely logical; while topping up equities in a collapsed market feels illogical and potentially reckless.
Having an impartial and independent adviser can help you make the right decision when it feels very uncomfortable to do so, because the adviser is sufficiently removed from the market to make a more objective decision.
The growth in popularity of the do-it-yourself platforms means that more and more private investors do not have the support of an adviser to guide them at these difficult times.
As can be seen from the numbers above, making the brave decision generated c9% more in returns over a single calendar year than a passive strategy, or c15% more than the ‘logical’ strategy. Those excess returns in a single calendar year could cover an adviser’s annual charges for many years.
What did your adviser do for you in 2020?
If you have any questions at all about any of the information covered in this article, please do not hesitate to get in touch.
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