West London

Permanent Wealth Partners

What’s the next thing I need to worry about with my investments?

There is a famous phrase within investment markets that you may have heard me use which is “markets climb a wall of worry”.

Put simply, there is always something to worry about. That’s what the news is there for. 2020 has been spectacular for giving us plenty to worry about and we still have over 2 months left, so its no surprise in the slightest that people are looking out for the next area to be concerned about for their investments.
However, I’m here to try to put your mind at ease. Well sort of anyway.

From a market perspective the cause of the next major leg down is…. drumroll please….. impossible to know and may not even exist yet.

Markets are very good at accepting and processing information and digesting that into the current prices. That’s what markets do – they value companies on future expected earnings which are forecasted using known risks and opportunities in the future. However, and I borrow a line from Donald Rumsfield here – it’s not the known unknowns, but the unknown unknowns we need to worry about.
Therefore by logic as these are unknown, then we cannot identify them and therefore shouldn’t worry about them. Sure we can worry about a market falls in general, but identifying the cause of that fall is pointless.

Have a look at the key reasons for market shocks over the last 40 years and tell me who, if anyone, predicted them?

2020 – Covid
2008 – Lehman Brothers bankruptcy
2001 – 9/11 Twin towers
2000 – Dot-com bust
1987 – Black Monday

My answer is virtually nobody apart from maybe George Soros and that guy from the Big Short. (good movie if you haven’t seen it)

Sure, I know. The news is full of bad news and keeps telling us this could have disastrous impacts on life, finances etc….  but most likely it won’t. Let’s take a look at a few of the current issues and unpack their potential impact on markets.

Covid wave 2
The main concern around at the moment. Definitely falls into the known unknown camp. Will infections get worse? Probably. Will we end up in more shutdowns? Maybe. Will it cause another huge sell-off like it did in February and March? Very much unlikely. Markets know all this and have accepted it, hence the reason why travel and hospitality company share prices have not yet recovered but a lot of the technology stocks are doing very well.
On the positive side we have a few potential vaccines around the corner (potentially even an October announcement from Pfizer is being predicted), we are much better at treating this disease and looks like the Government will do everything it can to stop schools from being closed and a national lockdown. It may be a grim prospect, but the market can handle it.

Trump/Biden US election
The US election is less than a month away and the comedy show of pre-election posturing continues. The risk here is not necessarily who wins, but if the election process works or not. If Trump declares victory on election night, bringing rioters onto the street, only to have it overturned as more postal votes come in, that seems a pretty grim prospect. Will that cause a blip to markets? Possibly. Is it likely to cause a 30%-40% drop? Highly unlikely.

Brexit
And speaking of comedy shows, Brexit continues in the 2nd line of most news headlines and is of great concern to a number of people. With Brexit though, the market impact potentially is a little different, because we’ve had a dry run with the referendum result itself back in 2016. If you remember we saw an initial drop, followed by a rally over the following weeks which put the FTSE +15% three months after the referendum. The principal reason behind this was the weak GBP. Most large international companies have offshore earnings so a weaker GBP actually makes them more valuable. Add to this, most of my clients have internationally diversified portfolios which means that all their non-UK holdings are worth more in GBP terms. Market impact? Minimal at best and potentially even positive.

Having these concerns around tends to keep investors less than fully invested. This means there is more potential cash to put to work as these worries gradually disappear, hence the phrase “markets climb a wall of worry”. There will be a crash again at some point in the future, we all know that, however we will never know what the cause is until its too late! We know this and your financial plan is in place to protect and prepare you for this– so given there is a lot to worry about, please don’t include your investments into this!

Adam

##The above is just opinion only and not personalised financial advice. Please call if you have any questions how anything above may impact your personal situation##