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The emotions that arise when investing

Archive for August, 2020

The emotions that arise when investing

Thursday, August 13th, 2020

Emotions are important. We should listen to them… most of the time at least. However, investing is one case when it’s best to let rational thought take priority over your emotions. By all means, listen to your emotions, but don’t be led by them.

Here’s a slightly shocking fact: In 2018, the S&P 500 generated an average return of 9.85% annually. However, research by Dalbar found that the average investor earned roughly half of that: 5.19%.

 Why? Humans are emotional creatures and investing is an emotional experience, therefore investors are tempted to make rash decisions like rapidly selling during a market downturn. 

When investing, a patient, logical approach is usually the most effective over the years. This means prioritising long-term investments over the impulse to buy and sell based on your emotions or short-term goals. 

We’ll admit that it’s hard to avoid becoming entangled in media hype or fear, something that can lead you to buying at the peak and selling at the bottom of the market, so you need to be self-aware enough to recognise when this is happening.


The cycle of investor emotions

It’s common for investors’ emotions to move in something of a cycle, similar to the one shown in the diagram below. The point of maximum financial risk lies at the top of the market curve. Here, there is the potential to make a decision motivated by short term gains, when it’s likely that the best gains have already passed.

Investors who wait until this point are often at risk of ploughing their cash into a market that might soon crash.

On the other hand, during times of rising market volatility, investors should remember the importance of looking beyond short-term market fluctuations and remember that although markets take time to recover, they usually do. If you sell during a downturn due to fear, you risk selling at the point where markets are lowest. 

You are essentially at much greater risk of being harmed by the adverse effects of ‘bad timing’ if you let your emotions get the better of you.

A better perspective

Resisting your emotional impulses isn’t easy while in the grip of a savage bear market or a raging bull. Because of the risk of long term goals being overtaken by emotionally motivated decisions, a mindset shift is necessary.

You should try to avoid thinking of your investments as immediate assets and stop dwelling on the daily fluctuations to your net worth. Rather than thinking “I lost £15,000 today” on the day of a large market fall, try to think in terms of your averages and your long term financial goals. You might have lost £15,000 on a single, awful day, such as some we saw in the ‘Covid Crash’ earlier this year. However, your portfolio might have gained £300,000 in overall value.

A balanced, long term investment strategy generally has a couple of features: 

Firstly, it takes into account that stock markets aren’t rational. You can’t rely on predicting the future of stock markets – billions have been lost on global markets to testify this. 

When looking back at stocks, it’s easy to fall into the trap of thinking “I wish I had invested at this time”. Unfortunately, it’s impossible to actually work out when the perfect time to buy or sell is when it’s actually happening. 

For instance, when markets fall, they often have small rises that form part of an overall downward slope. An investor might think that they are being smart by investing heavily in one of these ‘mini-troughs’, following the much lauded ‘buy low and sell high’ investment strategy. However, there’s no way of knowing for certain that this is actually the lowest point on the stock market. It might just be a momentary trough as part of a much steeper decline.

Another approach could be to consider ‘drip-feeding’ your money into investments, a strategy known as Pound Cost Averaging. 

Secondly, stronger investment portfolios tend to be diversified. There’s that old saying about not putting your eggs in one basket. Investing all your money in one place makes you far more financially vulnerable if those stocks crash. 

A stronger investment strategy would spread your money through different asset classes and different assets within each asset class. 

Whatever investment strategy you use, it’s best to try to gain a bit of emotional distance from your investments. Understanding what emotions you’re likely to be feeling is a good way to enable you to make effective decisions, but don’t let these emotions rule you. Please get in touch if you have any questions about this article.


The world is in recession. Why is the stock market rising?

Thursday, August 13th, 2020

Current World Bank forecasts indicate that the Covid19 recession will be the deepest since WWII and the Treasury’s forecaster has suggested that it could take until the end of 2022 for the British economy to return to its pre-coronavirus peak.

However, global stock markets seem to tell a more positive story. Markets are rallying across the world and have been so doing since their mid-March trough, with the US stock indexes leading the charge. Today, some markets – like the S&P 500 – are close to fully erasing their recent losses.

February and March were difficult months for stock market investors – with the sharp declines the markets were showing and wider economic chaos, sleepless nights were aplenty. Since then the stock markets have generally been positive. Many investors’ portfolios are close to their pre-coronavirus levels.

The divergence between economic news and stock market performance

While stock markets are closely related to the economy, they are not the economy. 

Stock investors look forward, beyond present conditions, into the future. And at the moment they are taking an optimistic view.

There are several reasons for this. 

Firstly, governments have responded with large economic stimulus packages. In Britain, we have had the furlough scheme, loans to support businesses and support for the self-employed. More recently, Rishi Sunak announced a further support package worth up to £30bn, which included measures to protect jobs, help younger workers and encourage spending.

As long as governments continue to support the economy, many investors will be willing to look beyond adverse economic headlines. 

Secondly, the medical news around coronavirus is a bit of a convoluted story, but one which does show promising signs for investors.

While the virus seems to be continuing to wreak havoc around the world with more cases and fatalities each day, the news appears to be reasonably positive on vaccine development and other treatments. If a vaccine is available for mass distribution in early 2021, life may return to normal sooner than expected. 

However, it’s not a foregone conclusion that the stock market surge will last. 

A second wave of coronavirus could require countries to implement stricter social distancing measures that would further dampen consumer spending. And there’s a chance that global finance ministers will not be able to extend the kind of economic support measures offered during the initial lockdown. 

Events like these would likely damage investor confidence in the future, causing stock markets to fall once again.  However, given the fact that many major economies are making a ‘V-shaped’ recovery,  we’d say the prospectus for investors is positive.

Should over-40s pay more tax to solve the social care crisis?

Thursday, August 13th, 2020

The question of who should pay for social care is a pressing one; successive governments have grappled with the issue and none have found a concrete solution. At the moment, some people who don’t qualify for local council funded care have to sell their homes to cover the costs, which can exceed £1,500 a week. 

Last year, in his first speech as Prime Minister, Johnson outlined the need for a reform of the current system and back in March, the government launched a parliamentary inquiry into the shortage of care available on the NHS. Since then, the large number of coronavirus deaths in care homes across the country has kept the issue firmly in the spotlight.

Ministers in Boris Jonhnson’s health and social care taskforce are currently studying a scheme where everyone over 40 would start contributing towards the cost of care in later life. Over 40s would have to pay more in tax or national insurance, or be obliged to insure themselves against hefty care bills.

Matt Hancock, the Health Secretary, is a keen advocate of the plan and is committed to coming up with a solution.

The system that ministers are considering draws on pre-existing models for funding social care in Japan and Germany. Both systems have drawn admiration as sustainable ways of solving the challenges that an ageing population brings.

Under the German system, everyone starts contributing to the scheme when they start working, and employers match their contributions, similar to workplace pension schemes in the UK. At the moment, 1.5% of each person’s salary, plus a 1.5% employer contribution, are ring fenced for social care in later life.

Elderly Germans can use this money to pay carers to help them at home or use them for care home fees. They can even give them to relatives and friends for helping to look after them. 

The Japanese scheme is similar, but people only start contributing when they are 40.

At the moment, nothing has been confirmed. Officials are still looking into the exact mechanism by which over 40s would pay. However, social care experts have cautioned that an insurance model would have to be compulsory to ensure people paid.

The scheme under consideration has found favour with campaigners. Caroline Abrahams, the charity director at Age UK, said the scheme “may be rather a good deal, since that system offers a level of provision and reassurance that we can only dream of here at the moment.” She added that the scheme would “arguably [be] an appropriate act of national atonement after the catastrophic loss of life we’ve seen in care homes during the pandemic”.

It will be interesting to see how the government eventually decides to finance its scheme. Watch this space.

Where does the value lie in the client/adviser relationship?

Thursday, August 6th, 2020

There are many ways that value is expressed in the relationship between a financial planner and a client; the most obvious being the way that an adviser can guide a client towards their financial goals, enabling a client to live the life they want in the future. Offering clear, unbiased advice is also viewed as an important source of value.

There are other, more subtle, ways that advisers deliver value – ways that might not be quantifiable as increased returns. 

For instance, financial advisers can demonstrate whether you have the financial security to move your life forward in the direction you want to take. Knowing you have this kind of security can provide you with a general confidence boost that can permeate through to other areas of your life. After all, the feeling of financial insecurity can have a large effect on your moods, emotions and personal relationships.

Measuring value

Researchers from Morning Star conducted a survey with 693 individual investors and 161 financial advisers about which attributes of the client/adviser relationship they thought were most important. Respondents were asked to rank 13 attributes of the service financial advisers offer from the most important to the least important.

On the whole, there was a ‘moderate agreement’ between both groups’ lists – a correlation of 0.46 for those of you who appreciate statistics. Investors placed “Helps me reach my financial goals” first, and advisers put this second, showing the importance that both parties place on creating a cohesive financial plan that works towards clients’ personal goals.

The survey results are most interesting when we begin to look at the points of disconnect between the two groups. Here, you can see the places where advisers really think they can deliver value that their clients might not be aware of.

The biggest disconnect that the survey found was with the goal “Can help me maximise my returns”. Investors put this fourth and advisers put this twelfth.

There is a reason why financial advisers place this further down their list of priorities. 

If, for example, a client approaches an advice firm with three years to go before retirement, with a desire to maximise investment returns before their retirement, they may say, “I want you to structure my portfolio so that it will grow rapidly, allowing me to retire with the largest possible nest egg”. 

Here, most advisers would try to communicate a goal-based approach in favour of one that prioritises short term gains.

An investing approach that aimed ‘to maximise returns’ would add a lot of risk into the equation, risk that could potentially jeopardise the client’s ability to retire comfortably.

Most advisers would try to explain to the client that the importance of adopting a goal based approach that reallocates funds to low risk investments would be a better idea in this situation, as it would increase the client’s chance of achieving their goal of a comfortable retirement.

Financial advice is about more than high returns

A financial adviser is in an important position to show clients the  value of a broader goals-based approach to investing and build long term trust that doesn’t fall when the market swings. Research shows that this interpersonal side of advice might be the most valuable aspect of professional advice.

In the above example of a client approaching retirement, the valuable interpersonal skills would involve the clear communication that demonstrates to the client the value of a goals-based approach, rather than emphasising short term returns.

Returns aren’t the be-all and end-all – advice should be about much more than stock picking on behalf of an investor. Much of the value comes from the relationship itself, a relationship that can lead to a cooperative financial planning approach that places the client’s life goals and finances in alignment.

August Market Commentary

Thursday, August 6th, 2020


If there was one word that characterised July, it was tension. Tension between Beijing and Hong Kong, tension between China and the US, and tension between China and the UK over Huawei. 

The UK made a citizenship offer to up to 3m Hong Kong residents and duly suspended its extradition treaty with Hong Kong. The US indicted two Chinese hackers for spying and President Trump is expected to take action against Chinese software, including the hugely popular TikTok, ‘within days.’ 

In the UK, July brought us Chancellor Rishi Sunak’s Summer Statement as he continued the fight against Covid-19. We report below on a sharp drop in US GDP in the second quarter. The UK figures will also make for grim reading when they are released and we can surely expect another round of stimulus measures when the Chancellor unveils his Autumn Budget. 

The Chairman of Microsoft said that the world faces a “staggering jobs challenge” with up to 250m set to lose their jobs this year. If Covid-19 has done one thing it is to accelerate economic changes we have long been writing about – another headache for Rishi Sunak as the furlough scheme in the UK starts to wind down. 

World stock markets had a mixed month in July: there were some remarkably good performances, although the UK’s FTSE index had a poor month. With Covid-19 cases in the US continuing to rise, the dollar suffered its worst month for more than a decade. 

As always, let us look at the details…


On 8th July – almost four months to the day after his March Budget speech – Chancellor Rishi Sunak delivered his Summer Statement. 

The Chancellor announced a “£30bn plan for jobs.” The country would, he said, be defined “not by the crisis, but by how we respond to the crisis.” 

As the Chancellor waits to see how the economy begins to recover before he unveils his Autumn Budget, the Summer Statement will act as something of a holding measure.

In the meantime, he will have plenty to ponder on. With the furlough scheme now gradually coming to an end, the job losses continue to mount, with 12,000 jobs going in two days at the beginning of the month and estimates at the end of July suggesting that lockdown has cost pubs and restaurants £30bn of turnover. 

More worrying, perhaps, are suggestions that many firms which might otherwise have folded have been artificially kept afloat by loans and grants from the government. The rate of insolvencies has slowed since March, but the Institute of Fiscal Studies is suggesting that many of these ‘zombie companies’ will struggle to repay the new debts they have incurred. 

Car production in the UK slumped to its lowest levels since 1954 and although consumer confidence edged up from its record low, confidence among small firms declined sharply. More than a fifth of the UK’s small firms expect their performance to be “much worse” over the next three months, with 75% of firms reporting that their profits fell in the last three months, up 33% on the same quarter last year. 

Optimistically, the Bank of England is now suggesting that an “uneven” recovery has begun. There seems little doubt now that the supposed ‘V-shaped recovery’ will not happen, and that some sectors of the UK economy will continue to struggle for some time. The latest research is suggesting that shareholder payments via dividends could take six years to recover. 

As we reported above, there were tensions between the UK and China over Huawei’s involvement in the country’s 5G network, and this led to inevitable counter charges from China and threats of reprisals against UK companies. 

With all of this news, it was hardly surprising that the UK’s FTSE-100 index of leading shares fell in the month. It was the worst performing of all the markets on which we report, dropping 4% in July to end the month at 5,898. 

With the dollar having its worst month for ten years, the pound rose sharply against it and ended the month up 6%, trading at $1.3098. 

Brexit & Trade Deals 

You may be familiar with the Sherlock Holmes story ‘Silver Blaze’ and Holmes’ famous quote that ‘the curious incident was that the dog did nothing in the night.’ 

July was virtually a ‘curious incident’ month for Brexit and any subsequent trade deal with the EU. With all attention still focused on Covid-19 and several of the leading participants due to go on holiday, August may well follow suit. 

There are now five months to go until the UK leaves the European Union, and it is looking increasingly likely that it will be without any formal deal. In the middle of the month, the Guido Fawkes political blog reported that both major trade deals – with the EU and the US – are ‘expected to miss their deadlines and not be concluded by the end of the year.’ 


On 17th July, Europe’s leaders met to try and thrash out a post-Covid-19 recovery deal. Hopes prior to the meeting were, apparently, ‘not high.’ 

The talks went into a fourth day but – after Europe’s longest meeting since 2000 – the objections of the ‘frugal four’ (the Netherlands, Austria, Sweden and Denmark) were overcome and a deal was eventually reached. 

Some hailed it as a victory for closer European integration but it is fair to say that there were also plenty of sceptical voices arguing that the North/South rift in the EU had widened and that the extra spending commitment – estimated at €1.8tn (£1.6tn) over the next seven years – was unsustainable given the expected contraction in the European economy.

We have written above about the decline in the UK car industry: sadly that is a pattern being repeated right across Europe, with German car production falling by 44% in the first five months of the year and 100,000 jobs thought to be at risk. 

The German economy shrank at its fastest rate on record in the second quarter, declining by 10.1% between April and June – the sharpest fall since Germany began producing quarterly figures in 1970. 

On the stock markets, it was a very quiet month for the German DAX index which rose just two points in the month to close June at 12,313. The French market fared less well, falling by 3% to end the month at 4,784. 


The month started well in the US – figures showed record jobs growth in June as firms started re-hiring and 4.8m jobs were added – but all the news in the month was overshadowed by the second quarter figures. 

The US economy suffered its worst ever fall in the April to June quarter, with GDP falling a historic 32.9%. You could put a positive spin on the figures by arguing that the consensus among economists had been for a fall of 34.7%, but the simple fact is that neither the Great Depression nor any other slump in the past 200 years has seen such a sharp contraction in the US economy. 

The figures, “just highlight how deep and dark the hole is that the economy cratered into,” said Mark Zandi, chief economist at Moody’s Analytics. 

At the end of the month, Republicans in the Senate proposed spending a further $1tn (£769bn) to help fix the ‘hole,’ with proposals including $100bn (£77bn) for schools and a stimulus payment of $1,200 (£923) to most Americans. The US has already spent more than $2.4tn (£1.85tn) in virus relief measures. 

The Federal Reserve duly repeated its vow to protect the US economy, but admitted that the long term health of the economy was bound up with the long term path of Covid-19. This continued to suppress domestic demand through July as individual states imposed renewed lockdown measures. 

In other news, Tesla overtook Toyota to become the world’s most valuable car maker as its shares rose again. The US stock market duly took its lead from Tesla rather than the bad economic news. The Dow Jones index was up 2% in July to 26,428 while the more broadly based S&P500 index rose 6% to 3,271. 

Far East 

July in the Far East – leaving aside the tensions over Hong Kong – was, perhaps, a tale of two companies and the impact lockdown had on them. 

At the end of the month, Japanese car maker Nissan warned of a record loss. The company said that the virus had hindered its ‘turnaround’ efforts, with sales slumping by 48% in the April to June period. It estimated the loss for the year at £3.5bn, with its shares unsurprisingly falling 10%. 

It was exactly the opposite story in South Korea as Samsung’s sales soared on the demand that has been created by working from home and home schooling. The world’s largest maker of smartphones said second quarter profits were up 23% on last year, with the results helped by strong demand for computer chips. 

If the news in July was bad for Nissan, it was also bad for the wider Japanese economy, which went into recession. Household spending in May was 16.2% down on the same period in 2019, the sharpest rate of decline since comparable data began in 2001. 

Despite the good news from Samsung, the South Korean economy was also in recession, with exports – which account for 40% of the economy – at their lowest level since 1963. 

We have already discussed the tensions surrounding China: those don’t appear to be reflected in the Shanghai Composite index which rose 11% in the month to close July at 3,310. The South Korean market also defied the bad news, climbing 7% to 2,249. The Hong Kong market posted a more modest 1% rise, closing at 24,595 while Japan’s Nikkei Dow index was down 3% to 21,710. 

Emerging Markets 

It was a quiet month for news in the emerging markets we cover in the market commentary. The most noteworthy event occurred in Russia, where Vladimir Putin effectively became ‘President for Life.’ 

In a referendum – held over seven days because of Covid-19 – nearly 80% of voters apparently backed an amendment to the constitution which will allow Mr Putin to run for two more terms as President. He had been due to stand down in 2024, but will now effectively remain President until 2036, when he will be 83. 

July was a good month for Mr Putin and a very good month for the three major emerging markets on which we report. The Indian stock market rose 8% to 37,606 and Brazil’s market was up by the same percentage to 102,912. The Russian stock market rose 6% in the month, ending July at 2,912. 

And finally 

There cannot be anyone reading the market commentary who has not now heard the term ‘social distancing’ – or noticed its inevitable impact on sporting events. 

One such event to suffer from a lack of spectators was July’s hot dog eating contest in the US. Every year thousands of people flock to Coney Island for this great sporting contest. They pack the beach in their thousands, cheering on the competitors. 

Until this year…

This year, of course, the hot dog eating contest had to be socially distanced and was duly held indoors. The good news is, despite the lack of support, records were broken in both the men’s and women’s categories. Winning the men’s contest for the 13th time, Californian Joey “Jaws” Chestnut swallowed an impressive 75 hot dogs in ten minutes. Miki Sudo, from Connecticut, won the women’s title, downing 48½ hot dogs. 

Speaking after the contest, 36 year old Mr Chestnut said, “One of the best things about this contest is the energy the audience brings. There’s been years when I don’t feel my best and the audience pushes me.” 

Also clearly not feeling their best – although possibly not from eating 75  hot dogs – were staff at the Met Office, who mistook a huge cloud of flying ants for rain. In a tweet, the confused Met Office wrote, “It’s not raining in London, Kent or Sussex – but our radar says otherwise.” 

Finally, figures were released during July showing that we spent £40.6bn trying to cheer ourselves up during lockdown, with consumers spending an average £771 each. As you’d expect, takeaway food and alcohol were high on the list, but Barclaycard also revealed that consumers bought an inflatable pub, a penny farthing and an antique diving suit. 

With the weatherman telling you it’s going to be raining flying ants, who wouldn’t want to climb into an antique diving suit?