Please find below our Investment Market Update as at 24th July 2020.
Blue Sky Investment Market Update
The risk of not understanding risk
Strap yourself in with a good cup of coffee, and a biscuit or two, as I dissect what risk really means in today’s environment. In part one of this two-part assessment, I’m looking at personal risk and the risk of not having a co-ordinated Financial Plan to help you live a fulfilling life.
Next week, I will be focussing on investment risk and how some assets which were deemed ‘safe havens’ now look risky and vice versa. My emphasis will be on knowing what is under the bonnet of your portfolio and the importance of not just leaving your money in the same old funds. Neil Woodford and UK Commercial Property funds being a case in point.
Finding your own rhythm
You don’t need me to tell you that we are living in very strange times on all sorts of levels. Some changing dynamics are very obvious when it comes to social interaction, but others are more subtle.
In our work as Financial Planners we are seeing changes in behaviours from clients and, indeed, their expectations. Many, particularly those who are still working, are recalibrating what’s important and how they want to live their lives following the ‘freedom’ experienced during lockdown. It may seem a contradiction talking about freedom at a time when many of our civil liberties were taken away, but I’m alluding to how there has been a shift in attitude and perception. Many new clients we are seeing at the moment, appear to have made a reassessment of what’s important to them based on the opportunity they’ve had to spend more time at home and work more flexibly.
One conversation I had this week went something like this; “I’ve realised that my quality of life wasn’t great and, in fact, the reality is I’ve been chasing the money and all those around me have suffered some collateral damage as a result. I’ve realised that I’ve been dancing to other people’s tunes and not my own”.
If I can summarise, carrying on with the musical theme; they no longer want to be reactive and instead are now seeking to find their own rhythm and resonate with their own wavelength, on their terms.
It is likely, if it hadn’t been for this crisis, that the person in question was at risk of just carrying on working ridiculous hours with long commutes to the detriment of relationships with friends and family, and possibly health!
But as this new client would attest, there’s a big difference between knowing what work/life balance is, and really committing to achieving it for yourself.
Enjoy your money whilst you have good health
I’m thinking about those close to retirement now. It’s quite natural to think that you should carry on working and earn some money in those last 2-3 years of your career, but when you actually work out your net take home pay, relative to your other assets, is it worth it?
It depends upon your quality of life and your aspirations. It also depends upon whether you enjoy your job and find personal fulfilment from it. If you are stressed and anxious and feeling like you are on a treadmill with little quality time at your disposal, perhaps you should do something about it earlier than previously planned?
The key is having a plan and evaluating your options. Having a plan places you, and your family, in the driving seat and in control of your future. The risk is that you carry on working until one day you become ill and haven’t had the opportunity to enjoy your money whilst you were in good health.
Having a co-ordinated and flexible Financial Plan allows you to assess your options, model scenarios and understand the implications of certain actions. It presents you with choices.
What is risk?
The word risk encompasses so many facets. It could mean risk in the context of working too long or too hard that your health suffers. It could be associated with investment risk; someone whose money is languishing in deposits with banks and building societies and losing money against inflation, could be taking an unnecessary risk. Failing to plan and adapt your finances to the various changes in tax legislation could also result in losing money.
When making decisions around risk, it is important to understand the cause and effects of any decisions and harmonise this with your short and medium-term aspirations. It’s essential to look beyond the immediacy and understand the possible implications further down the line.
Our attitude to risk
The vagrancies of stock markets around the world this year has certainly tested our tolerances for risk. It is widely thought that we experience far more pain from losses in relative terms, than the enjoyment we glean from gains.
Typically, in the advice sphere, we ask clients to complete a questionnaire to ascertain their risk approach. This is not the be all and end all, it complements the information we have ascertained in the early parts of the client relationship. Yet, the answers can sometimes change significantly, depending upon when clients are asked to complete the questionnaire. We undertook a small experiment with a handful of clients to prove this point.
Personally, I have always found the questionnaires quite limiting. So, what we did was ask a number of new clients to complete a risk questionnaire early on in their Client Journey with us, and then asked the same clients to complete the same questionnaire but after modelling various financial planning scenarios. It won’t come as a surprise to hear that the questionnaires completed later on in the process showed an increased appetite for risk.
On analysing the responses, what it was really telling us is that having a plan and being educated about what is possible, led to clients feeling less anxious about the future. Nothing new to us but it also highlighted the shortcomings of the questionnaire and the timing of when it is completed.
Understanding your innate risk
So, we know that our risk approach can change depending upon external factors and timing. We have always been interested in behavioural psychology here at blue Sky and how it influences decision making. What we really want to know though is what an individual’s innate risk is like, in order that we can ensure we match the right investment strategy with the various risk tolerances of individual clients. Innate, being what your core behaviours are about when it comes to money.
The reason this is important is that aligning investment strategies in harmony with innate risk improves the likelihood of reducing stress and anxiety for the investor. Recognising consistent client behaviours means that a more tailored client focused approach can be delivered, particularly in times of crisis.
The questions in a questionnaire are subjective but the actual reality may be very different than the answers given. If you’ve just watched the news before you’ve answered the questions, the responses will likely be more negative than if you hadn’t!
It is for this reason we have been party to a pilot for an App, believed to be the first of its kind in the world. We have piloted this for some clients who have an IOS device and we have been impressed with the results. So much so that this will now be embedded for every Blue Sky client in the future. Completion of the various games on the App will give both the client and us as advisers, a better appreciation of each clients embedded risk profile.
In our opinion, its essential that we offer advice by clearly understanding our clients’ risk tolerances. Seeing risk through a client’s eyes and not just our own is vital to avoid any angst when market conditions get tough.
Just a note here, this innovation is not in response to the pandemic. We were involved with the pilot before Covid. Our clients have been wonderful and supportive of the communications we have delivered over the last few months and we thank you for your comments. The launch of this App will simply deepen our relationships and bring added confidence to all parties. We are excited about the possibilities.
Investment market update
Dominating the headlines as we close the week, is the conflict between the US and China. What was once just a trade war has escalated into a diplomatic and technology conflict. The FTSE 100 is down by 1.52% at 9.30am this morning, which follows falls in the US and Europe. It was even worse in China with the CSI index closing down by 4.4%.
The catalyst for the pullback was Beijing announcing the closure of the US Consulate in Chengdu, in retaliation for Washington’s China’s Houston mission. On its own, this may seem quite insignificant, but it’s added another couple of layers to the continued conflict over trade wars, the Covid pandemic, Hong Kong and technology capabilities.
It would appear that the markets are now waiting nervously as to whether the situation will escalate with traders keen to reduce their exposure over the weekend.
There is always something to worry about, which is exactly why you shouldn’t spend your time worrying. It’s Blue Sky’s job to make sense of it all. Yet, the conflict between the US and China is a reminder that we should never be complacent and why it’s important to pick assets that steer a course through uncertainty. There is always somewhere positive to invest.
Let’s finish off with some good news
Retail sales brought good news as a report by the Office for National Statistics showed that sales rose in the UK by 13.9% in June. Higher than predicted by many analysts. Of course, this is backward looking, and a lot has happened since June, but beating market expectations is always a good sign.
Have a lovely weekend.
Gary and the Investment Team
Please Note: This communication should not be read as giving specific advice regarding your personal circumstances. This would only be given following detailed assessment of your individual needs. The value of investments may fall as well as rise; you may get back less than invested. Past performance is not necessarily a guide to future returns.