25 Oct Tune out the noise
So far this year, investment markets have defied expectations, but in a good way. A typical global portfolio has performed rather well so far this year, in spite of an unexpected EU referendum result and the sharp decline of the pound against other currencies. Added to this, is the uncertainty around the likely outcome of the upcoming 2016 US presidential race.
On Tuesday 11th October, the FTSE 100 reached its highest level in history, topping its previous record in April 2015. One reason for this is the decline in the value of the pound, in relation to other currencies. About 70% of the revenue of the companies that make up the FTSE 100 is derived from abroad, meaning that when the pound does badly, the FTSE does well. Of course the FTSE has since dropped back slightly.
The US presidential race has already offered plenty of surprises, but that won’t stop the pundits from making predictions on how this is likely to impact on the investment markets. It’s a fool’s errand though. What we know is that if there’s anything markets hate, it’s uncertainty. So it’s safe to expect that markets could be in for a bumpy ride in the run up to the election.
A recent research by Vanguard shows that US stock market volatility tends to spike in a presidential election year, but the volatility typically stops increasing shortly after Election Day. Accordingly, we can expect more noise and phoney predictions from the mainstream media in the wake of the Presidential election. It’s in their interest to do this. Sadly, it’s almost never in the best interest of longer term investors.
Much of this is empty noise for longer term investors. Vanguard research going back to 1853 also shows that the US stock market returns are virtually identical no matter which party controls the White House.
We must keep our focus on the longer term, rather than paying too much attention to short term movements of the markets. Sadly, most investors fail to understand how closely their emotions track the noise about the markets, and how such emotions often lead them to do precisely the wrong things.
I’ve always believed that a big part of our job as financial planners isn’t just about managing investments, it’s also about managing the investor. Our approach is to block out much of the meaningless news and predictions of the financial media in relation to your investment.
Our globally diversified portfolios are built with this in mind. They are designed to weather all market storms. There will be bumps along the way for sure. Count on it. But in the long term, investors who stay the course are handsomely rewarded.