Given current Brexit concerns and global economic uncertainty, we hear many people ask whether this is a bad time to invest. The simple answer is that it is not so simple! Generally, the most sensible approach is to invest for the long-term rather than wait on the side-lines for the ‘right time’.
The risks of trying to time the market
It is impossible to accurately and consistently predict market movements. At any time, external events, investor sentiment and even rumours can have a negative or positive impact, often unexpectedly and suddenly. Reacting to current conditions is usually too late, so to be successful, you would need to foresee both the best time to buy and to sell. Even experienced investors cannot get this right all the time.
Then there is the risk of missing out. It is surprising what a difference certain days in a market cycle can make to returns. If, for example, you are not invested because you are waiting for share prices to stabilise after a period of volatility, you could miss benefiting from rebound days if the market suddenly rallies.
To illustrate this, if you had invested £10,000 in the FTSE All-Share index for the full ten-year period up to 31 December 2018, you would have earned a profit of £4,754 (excluding fees or charges). But if you missed the five best days, returns would fall to £3,764, and again to £2,081 if the ten best days were missed. Meanwhile, being out of the market on the best 20 and 30 days would have brought respective losses of £132 and £1,896.
While it may feel uncomfortable to stay invested when markets fluctuate, this discipline usually produces better returns over the longer term than chasing short-term gains.
Investment performance: The bigger picture
It is all too common – especially in the media – to remember the extreme market highs and lows without looking at the overall picture. Most will be aware of 1987’s ‘Black Monday’ global stock market crash, for example, without realising that investors in the FTSE All-share index actually realised a 4% return over the year.
There also tends to be a focus on share market performance, particularly in one key region, such as the FTSE100 in the UK or the S&P500 in the US. However, wise investors will never have all their interests in one asset class (e.g. equities) nor in one geographical region. So when we hear about shocks in one share market, this overplays the actual impact on most investors.
The importance of diversification
Before investing, you need to ensure that your strategy is well diversified and suitable for your situation, risk appetite and goals. Even the most patient investor is unlikely to benefit from an ill-fitting portfolio that does not meet their needs or is overly concentrated in one area. And yet many British expatriates tend to be over-invested in the market they know, making them highly vulnerable to the fortunes of UK assets and sterling.
The best strategy for minimising risk is to diversify by spreading investments across multiple, unrelated areas. This should include a range of different asset classes (shares, bonds, cash and ‘real’ assets such as property) as well as geographical regions and market sectors. Diversification gives your portfolio the chance to produce positive returns over time without being vulnerable to any single area or stock under-performing.
Choosing an adviser who uses a dynamic ‘multi-manager’ approach can help increase diversification. By combining several carefully selected fund managers, this reduces reliance on any one manager making the right decisions in all market conditions.
Establishing a suitable investment approach
When investing, it is crucial to carefully assess your situation, income requirements, goals and timeline alongside your appetite for risk. This is best done objectively by an experienced professional who can then build a diversified portfolio with the right balance of risk/return for your peace of mind. Your arrangements should also be structured as tax-efficiently as possible for your life in Spain. Talk to a locally based adviser with cross-border experience to make the most of available opportunities.
If today’s climate still makes you nervous, you could consider spreading the timing of your investments over a period by investing in tranches. The ‘pound (or euro/dollar) cost averaging’ approach can help smooth out volatility and potentially improve average returns over longer time periods.
British expatriates may also benefit from exploring investment structures that have a multi-currency facility to minimise exchange rate risk. This would allow you to invest, for example, in sterling now and then switch to euros as you wished, and choose the currency of withdrawals.
Ultimately, a long-term, diversified investment approach is vital to help protect and grow your capital, whatever the economic climate. While a ‘keep calm and stay invested’ approach usually gives the best overall results, make sure you still review your planning once a year, or sooner if your circumstances change, to continue meeting your long-term financial goals.
For more information and personalised advice, contact Blevins Franks on +34 971 719 181.
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This article was written on the 4th of November, 2019.