It is easy to believe when reading, watching, and listening to news items that we are in unprecedented territory when it comes to global economics and geopolitics. The powers that be are posturing. Actions and reactions. What next, we are thinking, as anxiety inducing headlines appear day after day.
Whenever I find myself perturbed, I calm myself with a long hot soak in data. Here is a nice relaxing fact: Looking at the last 100 years of data, the average of all the upward movement in the global stock markets has been 461% and lasted 6 years and 10 months. The average of downward market behaviour created drops in value of –34% and lasted 1 year 6 months. So the historical data tells us that markets rise more than fall and the gains are much bigger than the losses!
FACT – The markets go up more than they go down
It is human nature for us to get caught up in what we have recently heard or seen. When the news is overweight with drama about market corrections, it can start to feel as though the markets are always falling. The data tells us this is not true.
The trick to successful investing is to zoom out. Don’t let sensational headlines get you focused on short term market movements when your goal is long term investment growth. The markets can, have and will continue to deliver long-term growth.
How much should I believe the news stories that are forecasting economic trouble?
It is hard to find a news story on any subject that forecasts good news. It appears to be a fact of life that we readers are more interested in knowing about the drama and risks apparent in the world we inhabit, than to be reminded that most of what is happening is mundane, possibly even good. The daily news cycle is loaded with news of risk and danger. Journalists use sensational language to give things an alarming and attention-grabbing tone because that’s what sells stories.
For example, which of these headlines describing the recent discounting of stock market values is most likely to grab your attention?
“Efficient markets turn competition amongst global traders into a fabulous buying opportunity for investors”
or
“ As the world goes to war on trade, billions are wiped off the value of company shares”
The good news, that no one is shouting about, is that market corrections are part of normal market function. Here is a chart for the last century, showing the ups are bigger, better and more permanent than the downs – nothing is broken. Boring but true.
Has the economic landscape changed fundamentally this time?
In actual fact, far from being in a groundbreaking new era of geopolitics and unprecedented economic territory, it seems rather more like we are going backward to me. For all the noise about President Trump’s “Liberation Day”, tariffs are not some newfangled things, but a rather old fashioned and somewhat blunt instrument that has been used by traders to skew market advantage since trading began.
The good news is that when you are doing something that has been done before you can look at the data for an idea of likely outcomes. I say good news, but confoundingly, there is no evidence that introducing tariffs will improve the global economic outlook or even improve the American economy!
It seems to me that President Trump is more interested in how history will remember him than the economic outlook for America, let alone the globe. He has created an environment where all nations now have to line up at the door to the White House and go through a trade negotiation. He has set the scene for his performance as a powerful individual and can now demonstrate his prowess as a dealmaker. Let’s see how he does over the next 4 years, which is a very short term in the period of global economics. The next administration may end up dealing with the aftermath of policy that restricts trade, subsidises industry, causes inflation and stagnating manufacturing capabilities but this is just another cycle in the long-term game of capitalism.
How do I know investments will grow in this environment?
Every coin has two sides. Once the coin lands, and the market knows which way is up, it works out how to profit from that. That is the nature of a market. Some examples from recent history:
Covid – shopping centres, cinemas and office blocks fell in value as lock down made them superfluous, while take away delivery services, online conferencing software and at home exercise equipment, gained in popularity.
Russia invading the Ukraine brought war to Europe for the first time in most people’s living memory – investments focused on delivering great potential for future generations lost ground after a fairly long cycle of growth through a peaceful period. Then things changed and the world was ready to invest in arms, fossil fuels and currently profitable companies as we worried about our short-term security and energy supply costs.
The good news is that the great companies of the world are continuing to do what they do. If you have a well-diversified portfolio, you will be backing them all. Some are popular right now and some are not. They will change places with each other as the economy goes through various cycles. If you maintain your spread and avoid trying to second guess the next trend, cycle, movement, winner or loser you will see the just rewards due to those who invest wisely and patiently.
The data below shows how hard it is to find any sort of pattern and therefore any method for predicting what next year’s winning asset class will be. The only way to be sure you get a slice of the action is to have a bit of everything. That means you will also own a bit of the poor performing sector as well. That is the point of diversification. It is not a mistake to own some of the worst performing assets – it is a feature of diversification. The mistake is to imagine you can guess which will be which next year.
How are President Trumps trade tariffs going to impact my portfolio?
There is no doubt that anything America does is globally influential. When you look at a map of capitalism by market value, America represents the biggest player in the game (see chart Vanguard 2019).
It is also important to acknowledge that they benefit from having other players in the game with them.
America needs to sell stuff to others and there are going to be things it needs to buy. That hasn’t and won’t change.
What has changed is that Liberation Day has put fines on imports to create an uneven paying field intended to make American products more attractive to American buyers. However, history tells us the result will be American manufacturers will have no need to be price competitive without rivals in the market. This results in shareholders getting a short-term bump in dividends from inflated prices followed by a steady decline in profitability.
- Consumers pay more because American manufacturers put prices up to marginally undercut the artificially high-priced imports – this results in inflation.
- Manufacturers become less efficient as the drivers of completion remove the necessity to improve and refine in order to survive.
- Shareholders find the once great company they backed has stagnated without the stimulus of competition and market forces.
Lose, lose, lose as opposed to win, win, win.
I am not a political commentator and don’t pretend to be, but it strikes me that Donald Trump has built his wealth, power, influence and political career out of deal making. It is what he does. By introducing tariffs, he has created an arena in which his gladiatorial experience and well-rehearsed maneuvering skills will be an asset.
Whatever Trump’s personal strengths are, the markets will learn to exploit the situation he has created, that is what markets do. The market has no personal limitations or strengths. It is a machine, and its ultimate purpose is to match supply and demand. If Donald Trump artificially restricts supply, then prices will rise as with any demand crunch – thus it has always been and thus it will be again.
President Trump has 4 years in which to seek glory. He has rigged the game for short-term personal benefit and is not concerned about the longer-term consequences of inflation and lack of competition leading to stagnation of economic dynamism in the future. That will be someone else’s problem, which is the cyclical nature of the electoral system.
How can I make sure my investments don’t lose money?
Have an emergency fund that you keep in instantly accessible cash. This money is to ensure you don’t need to use invested money if an unexpected cost or event crops up. That way, you get to choose when to take profits from investments and are never forced by circumstance to sell at low point.
Be patient and well diversified. A globally diversified investment portfolio goes up by more than inflation over the long term. This chart shows that global stock markets returned an average of 12% per year over the last 50 odd years. The answer is invest and stay invested in order to make money.
Why can’t I just leave my money in the bank where it is safer?
If you leave money in savings, it will buy less in future because the interest rates are not enough to combat price increases. This means you will get poorer.
You should keep enough money in savings to be sure you can cover your planned spending in the next 5 years. Most of us have an income that covers most of our outgoings, but we may have some bigger spending planned like holidays, car replacement or home improvements that we need to save up for. This is the amount that is appropriate to have in cash savings.
Any amounts that are not due to be spent within 5 years, and are not part of your emergency fund, should be invested to protect its buying power in the future.
The chart below shows that cash is a slow grower compared to other things you could invest in.
How do I choose an investment that is right for me?
Timeframe – Start by asking yourself when and what you need the money for in future. Once you have a plan you know what investment timeframe you are working with.
Expectation – Check what to expect from an investment by looking at the history. There is lots of data that points out what you can expect from an investment portfolio based on what it would have done in the past. Obviously, history is not guaranteed to repeat itself, but you can get a good flavour of the best, worst and likely scenarios and whether they suit you.
Diversification – The best way to start investing is to keep it simple. Don’t try to pick a winner. Just trust that globally diversified portfolios make money over the long term. Get one with a good spread across all markets, sectors, currencies, asset classes and geography.
Cost -Select a portfolio with competitive costs – there are lots to choose from.
Tax – Once you know what type of portfolio is going to work for you, check out which tax wrappers might be available to protect the returns from taxation – maybe an ISA or a pension wrapper?
Advice – If you need help setting up your investments, then ask. The cost of expert advice will be easily covered by improved investment returns compared to leaving all your money in savings, and most advisers can save more than their fees by helping you improve tax outcomes.