Investing over time for expats in Europe

Whenever we write about investment markets and the economy- and this has been true for me for 25 years- there is always something happening that has an influential impact on the markets and short term investment returns. These events or factors are often described as extraordinary, but if we take a step back and look at the longer term, we see there is a constant sequence of events, one after the other. Some are positive, some more negative, but there appears to rarely be a period of calm seas and benign markets. With this realisation, it challenges us to think how one should manage their investments in a constantly changing environment.

Perhaps the first step is acceptance of the environment; as one of my undergraduate lecturers used to state, “normal is just the mean of abnormal”. 

Thereafter, for us at Black Swan Capital, it is a reinforcement of our objectives based approach to investment management. This means not trying to predict the next hot thing, and certainly not to chase last week’s or last year’s top performers, but to manage assets in a tactically adjusted diversified manner that is built around the best way to help you achieve your goals. By being focused on what you are trying to achieve can help remove some of the noise of short term market movements.

To support this, there were some illustrative examples from the most recent JP Morgan Guide to the markets report.

The first and most startling is the following average investor return graph. This graph shows US data for the average investor return annualised over 10 years. It infers that investor behaviour can have a larger impact on returns than market performance. Why? The reason is that some investors are prone to move with the momentum of the market, selling when markets drop and realising losses, then waiting until market have already recovered before re-entering, missing out on some of the gains. It is difficult and it often feels unnatural, but this graph illustrates that an investor that maintains alignment to their portfolio across cycles will do better. Of course active management and tactical adjustments are necessary, and the combination of this with the discipline of sticking to an objectives focused strategy is where a firm like Black Swan Capital can add real and substantial value for a client.

One of the big factors influencing investors is managing risk versus volatility. We consider them to be two very different factors.

We define volatility as market price movement, up or down, from one period of time to the next. This means your asset may be worth more or less than yesterday or tomorrow.

Risk however, is the possibility of your asset becoming worthless, of you losing all your money.

One way to manage volatility and reduce risk is by diversification, which is to spread your investment across a number of different types of assets. The other reducer of volatility, or risk of a negative return is time. The graph below shows the reduction of risk over time by diversification across all timeframes. This data analysis shows that since 1950 there has never been a negative 5 years rolling return for a 50% equity 50% bonds portfolio. Even a 100% equity portfolio has not generated a negative return over any rolling 20-year period. In short, time reduces risk of a negative loss and diversification can reduce volatility.

This highlights that assets with higher growth potential in the longer term have more volatility in the short term, and therefore risk of short term losses. Over time however, they tend to outperform.

This is shown below.

This brings us back to an objectives-based approach and not trying to predict which market sector will outperform next. The patchwork quilt table below ranks how different sectors performed each year. You can see that if you tried to follow the previous year’s top performer that you would greatly under-achieve market averages and probably your expectations.  

These illustrations showing actual market data are a good reinforcement of how to manage your money over time, and the importance of staying focused on your goals. Remember that markets go up and down over time and in the long term trend up, and that is the wealth accumulation that helps you to achieve what you are setting out to do.

If you would like to discuss your situation, your goals and objectives and how to achieve them, reach out to us and we will be happy to speak with you.