In volatile markets, perspective is everything. Drawing on the quirks of snooker, Edward Kennedy, Head of Marlborough’s Personal Portfolio Service, shares his thoughts with us on how investors and advisers can avoid the pitfalls of overreacting to short-term gains or losses, and why framing investment outcomes within a broader context is essential for long-term success.
I used to dabble in snooker. “Dabble” is an entirely appropriate term, because I wasn’t exactly World Championship material. Squinting through the sort of gigantic specs that Dennis Taylor made famous back in the 1980s, I was less than renowned for my accuracy.
Thankfully, a wonderful aspect of virtually any pursuit is that something vaguely resembling brilliance can suddenly appear from nowhere. It was thanks to this phenomenon that I very occasionally played quite well.
I might, for example, string together a break of 30 or so. While this would hardly have Ronnie O’Sullivan cowering beneath the table, for me – an enthusiastic part-timer with dodgy eyesight – such a feat was nothing less than spectacular.
Unfortunately, disappointment almost invariably followed. More often than not, I would head into my next match believing further sensational deeds were on the cards – only to discover I was rubbish again.
You may think I needed to practise harder, work on my fundamentals, buy a new pair of glasses and so on. You’re probably right. On another level, though, this tale taps into a consideration that’s of huge significance for investors and the professionals they trust to enhance and preserve their wealth: expectation management.
The issue is essentially this: it can be perilously easy to confuse anomalies with “new normals”. Today, in an age characterised by uncertainty and volatility, it’s vital that anyone engaged in a life-long financial journey understands the distinction between the two.
The perils of misguided extrapolation
With expectation management, whatever the setting, context is all-important. It’s the key to promoting an outlook that’s firmly rooted in reality. Let me illustrate this point by first quickly returning to my snooker exploits.
Imagine I play four frames. The first, second and third generate nothing much to get excited about, but in the fourth, in my very last contribution of the match, I somehow engineer a break of 40.
The joy will stay with me for several days – just as it does with a golfer who birdies the 18th hole at the end of an otherwise wholly unimpressive round. But what should I expect to happen when I chalk up, say, the following week?
Human nature dictates I’ll be itching to rattle off another 40 or something better still. And when that doesn’t happen – which would very likely be the case – I’ll be utterly dismayed, probably quite angry and maybe even rather confused.
Yet such a reaction would be misguided. Why? Because the previous week’s 40 break was clearly an aberration. Even those four frames alone would strongly suggest as much. If I were to take the time to scrutinise the full sweep of my snooker “career” – to use the word rather loosely – I would realise even a break of 20 should be regarded as highly unusual and that I ought to temper my expectations accordingly.
In other words, by examining the bigger picture, I would soon come to see I had fallen into a familiar trap. I had experienced a rare event and extrapolated it into a “given”. This is a common mistake – one of which investors and their financial services providers must always be aware.
What is “normal” for investors?
From an investment perspective, the period between the end of the global financial crisis and the ravages of the COVID-19 pandemic produced perhaps the most notable anomaly of recent decades. Defined by low interest rates and abundant credit, it was the era of “easy money”.
Many investors, especially those with little or no knowledge of the economic landscape prior to 2008, inferred this was pretty much how things had always been and would forever remain. In fact, like one of my 20-plus breaks, it was a blip – albeit one that lasted around 15 years.
What we have today is in many ways more in keeping with historical norms. It’s never “easy” to make money, of course, but it’s generally more difficult now than it was between the late 2010s and the early 2020s – and investors need to acknowledge this.
In addition, they need to appreciate that individual ups and downs, while inevitable, must also be viewed in context. A conspicuous gain doesn’t necessarily indicate the only way is up. A conspicuous loss doesn’t necessarily indicate the only way is down.
Ultimately, for whatever reason, these things happen. It’s unwise to get either too excited, as I used to when I miraculously contrived to pot five or six balls in a row, or too despondent, as I used to when I subsequently failed to repeat the trick. Grounded, informed pragmatism tends to be the best response.
The financial advice community has a major role to play in encouraging this mindset. In tandem, by working closely with advisers and clients alike, investment managers can also help. The basic message might be humdrum, but it reflects the enormous value of a rational investment philosophy that aims to balance risk and reward and is focused on the long term.
Edward Kennedy is Head of Marlborough’s Personal Portfolio service. Earlier this month, he spoke to Matt and I for the IFA Talk podcast series, when we spoke about a comparison of MPS with more bespoke investment solutions and why the two approaches should no longer be seen as being in direct competition with each other.