Wealth preservation: is the bull market dead?
Taking a proactive approach to market changes can help you preserve your wealth against turbulent economic backdrops. Our Head of Investment Strategy, Chris Lewis, and Wealth Planning Director, Christopher Hogarth, speak to us about how they are protecting their clients’ wealth.
The first half of 2022 was characterised by unsettled markets, including a sizeable sell-off in the previously buoyant technology sector. The backdrop of weakening growth and persistent inflation is likely to cause market volatility to persist into the second half of the year, but our experts argue that careful investment management and good wealth planning can make sure that investors don’t feel every bump in the road.
For investors with a long-term time horizon, remaining invested has historically benefitted longer-term returns. Creating a balanced portfolio is about blending an individual’s risk appetite and investment goals with long-term assumptions about the performance of different asset classes. Those assumptions will take into account that there will be highs and lows in financial markets.
Exiting the market in response to short-term volatility risks missing key days in the market, which can significantly dent returns. Data going back to 1930 found that missing the S&P 500’s ten best days each decade gave a total return of 28% against 17,715% for the investor that kept faith with markets1. The conclusion being that trying to time entry and exit into the market is a risky strategy and is likely to add cost and erode investment performance.
A portfolio should reflect changes in the interest rate environment, the potential for inflation and the weakening economic situation, just as they would reflect a more upbeat environment.
Nevertheless, that doesn’t mean investors should ignore volatility altogether. It is important to align an investment strategy with the realities of the economic environment. A portfolio should reflect changes in the interest rate environment, the potential for inflation and the weakening economic situation, just as they would reflect a more upbeat environment.
This informs Cazenove Capital’s approach. Chris Lewis, Head of Investment Strategy, says: “We look at the direction of travel: the market environment we’re operating in and, more importantly, the environment we feel we are moving into and try to stay ahead of the curve. We aim to take a proactive approach to market changes rather than a reactive approach.”
Long-term themes can transcend short-term economics
It is also important to focus on long-term structural themes in the economy that transcend short-term economic weakness. This helps steer the portfolio towards companies that can grow and compound their earnings year-on-year whatever the economic weather. However, even where the theme is robust and enduring, there may need to be changes to reflect the environment. Chris says: “Within technology, for example, we have shifted our exposure away from small-cap companies to higher quality large-cap companies. At this point in the business cycle, we prefer to allocate capital to companies with strong balance sheets and the ability to pass on higher input costs to customers to help defend margins.”
Shorter-term tactical decisions can also help build portfolio resilience. Commodities were introduced in December last year with the aim of providing some inflation protection in portfolios. Infrastructure assets also feature across the portfolios. He says: “These act as a partial inflation hedge. Having an allocation to real assets can be beneficial in an inflationary environment.” It also informs where not to invest. Fixed income, for example, has had its worst start to the year in 240 years.
Wealth planning is more important in difficult markets
During moments of turmoil, it is also more important than ever to follow sound wealth planning practice. At a time when returns may be lower, investors need to ensure that savings are being managed in a tax-efficient way. Using ISA and pensions allowances, or venture capital trust investment and offshore bonds allows savings to grow faster because they are compounding in a gross environment rather than a net environment – i.e. before taxes and other fees have been taken. Investing regularly also becomes very important, ensuring that money keeps being added when markets are lower.
There are also specific considerations for those that need their money in the shorter term, either because they need a lump sum or an income. For those investors who can’t wait out market volatility, there is a risk that they crystallise losses when markets are lower. This is the phenomenon of “pound-cost ravaging”, where the value of an investor’s portfolio drops, they take out an income or lump sum when it is lower, leaving them with progressively less capital to use to create an income in the future.
In this type of situation, we might advise investors to keep a little more in cash as something to fall back on.
Looking ahead is key. Christopher Hogarth, Wealth Planning Director at Cazenove Capital, says: “We spend a lot of time trying to ensure that investors are not exposed to short-term changes in market direction. We seek to understand when they are likely to need their cash, and plan in advance so that investors do not find themselves taking money out of the market as it is falling.”
Proper cash flow modelling will also help people see the potential impact of inflation on their savings and investment and plan accordingly. Hogarth says: “In this type of situation, we might advise investors to keep a little more in cash as something to fall back on. This means they aren’t reliant on taking money out of the market for income.”
The same applies for taking money out of the market for any other reason. He adds: “We also believe people need to be careful on gifting and ensure they don’t leave themselves short. We model everything before those gifts are made and stress-test an investor’s portfolio.”
Volatile markets shouldn’t trigger any sudden moves. However, that doesn’t mean ignoring their impact. The market environment has changed and investment portfolios need to reflect a new environment of higher interest rates and inflation. Equally, those who need to withdraw money from their portfolios in the shorter term will need to plan carefully. Prudent wealth planning and investment management becomes more important than ever in a climate where strong returns are hard to come by.
For information purposes only and nothing in this article/on this slide should be deemed to constitute the provision of financial, investment or other professional advice in any way. You should seek professional advice for your individual circumstances.
1'This chart shows why investors should never try to time the stock market', CNBC, March 2021 https://www.cnbc.com/2021/03/24/this-chart-shows-why-investors-should-never-try-to-time-the-stock-market.html
This article is issued by Cazenove Capital which is part of the Schroders Group and a trading name of Schroder & Co. Limited, 1 London Wall Place, London EC2Y 5AU. Authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and the Prudential Regulation Authority.
Nothing in this document should be deemed to constitute the provision of financial, investment or other professional advice in any way. Past performance is not a guide to future performance. The value of an investment and the income from it may go down as well as up and investors may not get back the amount originally invested.
This document may include forward-looking statements that are based upon our current opinions, expectations and projections. We undertake no obligation to update or revise any forward-looking statements. Actual results could differ materially from those anticipated in the forward-looking statements.
All data contained within this document is sourced from Cazenove Capital unless otherwise stated.