In response to the recent market downturns, Rick Eling provides you with ’10 Things to Remember When Markets Fall’ to help cut-through the noise and achieve your clients long term investment plans.

  1. Headline Index Falls vs. Client Falls

Clients will be reading some scary numbers on the news and online. Talk of “1,000 point declines” and “FTSE down 8% this morning” is bound to cause concern. But remember that only a minority of advised clients will be 100% invested in shares. At CAFS the most popular client risk level is Balanced, where Matrix funds hold only around 50% in shares. And some other assets have quietly gone up in the last few weeks, not down. But no headline writer wants to trumpet the fact the government bonds have advanced, because…

  1. The media needs sensation…but clients need patience

Media is competitive. There’s less attention, and therefore less money, in measured and rational commentary then there is in doom and crisis. It is in news editors’ interests to stoke things up. Advisers need to do the opposite: dampen down the fears. Don’t let clients be pulled this way and that by the whims of front page headline writers.

  1. We build our Matrix for times like this

There’s a reason why the word “risk” is never far from the Matrix. In rising, calm markets it can seem like we’re being excessively cautious, but at times like today the reason for that focus on risk becomes clear. We need every single Matrix fund to behave as we’ve led clients to expect. In other words, the Matrix needs to keep the promises that our advisers make. How is it doing?

At the time of writing (Monday 9th March) (all downside figures peak-to-trough since the start of the Coronavirus falls):

  • The average Conservative Matrix fund is so far down -2.96% versus a AR estimate* of -7%
  • The average Balanced Matrix fund is so far down -4.8% versus a AR estimate of -10%
  • The average Moderate Matrix fund is so far down -7.5% versus a AR estimate of -15%
  • The average Dynamic Matrix fund is so far down -9.53% versus a AR estimate of -20%
  • The average Adventurous Matrix fund is so far down -10.36% versus a AR estimate of -25%

*“ AR estimates” are the statistical measures we use to estimate annual downside in 5% of all investing years, or 1 year in 20. It’s possible in extreme condition for funds to go below that level of downside and it’s important not to present them as guarantees.  But right now we are well within estimates and all Matrix funds are behaving as expected.

  1. Always ‘Pan Out’ Your iew of Markets

This is the worst FTSE fall in history, from October 1987:

Looks horrible, doesn’t it? But note that the market actually ended that year up by over 6%! The dramatic fall grabbed the headlines and that is what we remember today. The steady 40%+ gains in the first nine months of the year get forgotten.

But, much more importantly, here is that same “record” crash on a genuine long-term view:

It’s not much, is it? Hardly a blip. Not worth a panic.

  1. Remember Dividends

We also have to remember that, when it comes to shares, prices make all the noise and grab the headlines… but it’s dividends that do the real work. Here is the same long-term FTSE 100 chart from above on both a Total Return basis (Red) and a Price Only basis (Blue):

You can see that the Price Only return (the return to the investor from capital appreciation in the index alone) is 284.9%. The Total Return, which includes the impact of reinvesting dividends, is 1265.33%. The difference is massive. And yet we seldom hear about equity dividends on the news.

  1. Be Careful with Short-term Charts

On the subject of charts, please remember that indices and funds price at different times. A share index will post its price at the end of the trading day (1630 weekdays in the UK), whereas OEICs will tend to price at 1200 the next day, or even the day after in some cases. This mismatch in price points can lead short-term charts to give misleading messages, so be careful what you draw.  It’s better to let a market move play through fully before you start building charts.

  1. Don’t Try to Time It

Yes, I wish I had clairvoyance, too. I’d sell just before the dips, buy just before the rises, and wallpaper my castle with £50 notes.  But I can’t do that, because markets are unpredictable by their nature. Investors get paid, over the long term, a premium over risk-free assets as a reward for bearing uncertainty. If it were possible to get the returns without the uncertainty then everybody would do it and the return premium would be arbitraged to zero. You can’t do what’s right for clients by pretending to know exactly when to be ‘in’ or ‘out’.

  1. The Economy is Still There

Coronavirus is very worrying, and the global attempt to mitigate its spread is going to slow down activity for a while. It’s not so much the virus itself that is causing market falls, but the constraints on human activity that follow it.

But beneath these legitimate concerns lies an economy still functioning, demand still present, workers still trained and capable, machinery still turning, minerals still in the ground, holidays still to be taken, bellies to fill, roads to be repaired…everything that we collectively call “The Economy”. It hasn’t gone away. If it slows down for a bit it will only come back all the stronger.

  1. What Was the Client’s Original Plan?

So let’s ask the questions that really matter, Mr Client: what was your plan when you made this investment? What timescale did you put on it? What risk level did you agree to accept? What part of your life was this investment designed to serve? And what part of your plan involved waiting for an opportunity to sell your holdings for a loss? If you can sell, it means somebody else wants to buy. Don’t let your hard-earned capital be somebody else’s bargain.

  1. Be There for Clients

They need you now more than ever. Be available. Answer emails quickly. Take the worried phone calls. Remind them that this is not the first time that markets have had a bad run, and that you understand how they’re feeling. You understand the urge to “take action”, whether that action be prudent or not.

It is important to take professional advice before making any decision relating to your personal finances. Information within this page is based on our current understanding and can be subject to change without notice and the accuracy and completeness of the information cannot be guaranteed. It does not provide individual tailored investment advice and is for guidance only. Some rules may vary in different parts of the UK.

Tax and Estate planning are not regulated by the Financial Conduct Authority

The value of pensions and investments can fall as well as rise. You may get back less than you invested.

Will writing is not regulated by the Financial Conduct Authority.

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