Last year I was ‘lucky’ enough to be able to take on the Tough Mudder obstacle course courtesy of Vanguard Investments. It was a lot of fun, if a slightly odd thing for a big investment company to do and during the corporate chat at the start before we warmed up, the Vanguard CEO admitted that he thought it was a bit of a nuts idea, potentially injuring a whole bunch of their customers, or at least in my case cutting, bruising, bashing, soaking, chilling, and towards the end, electrocuting. But maybe that’s their idea of customer service.
Anyway, it was great fun, (I’m a bit weird like that) and a good day out, and I rather hope it becomes one of those industry events that happens year after year.
The spin from Vanguard was ‘get active’. They have been known as index trackers in the UK, and as providers of low-cost systematic investments for decades, indeed we use a couple of their funds within our portfolios, because we know they ‘do what they say on the tin’ at a very low cost.
However, this article isn’t a puff piece for Vanguard or even particularly about what most people think of as active investment (apparently Vanguard are also big active investors).
When the financial services industry talks about active investment, they usually mean trying to pick ‘winners’, often by analysing information about an individual company or market, then trying to extract meaningful information from that analysis that means the manager has an ‘edge’ over the competition by knowing something no-one else does.
Fundamentally, I think this is…optimistic, at best, in any market which is vaguely efficient and no more than marketing ‘blah’ most of the time. At Walden Capital we believe we can demonstrate that diversification, spreading your investments widely and focussing on managing risks, is more likely to give you a consistent investment experience in line with your (reasonable) expectations.
Anyway, back to ‘getting active’. It sounds great, being dynamic, taking charge, making the changes that have to be made. But that feeling of determination to take control can lead an investor astray. Investment should be a marathon not a sprint, and despite obstacles along the way, changing direction whenever there is a challenge isn’t more likely to lead to the right finish line.
OK, maybe starting this article talking about a race, with obstacles that can distract you from the path and where things get harder as you get tired, but where the ultimate route to victory just means keeping to the right path is perhaps a little transparent. But the thing about the truth is that it often is transparent, obvious when you hear it, and it absolutely should make sense. That doesn’t necessarily make good advice easier to follow or any less of a revelation if you’ve never heard it before or have an instinct for the opposite.
There is an entire industry within financial services that encourages you to be a ‘busy fool’ – to give in to that urge that ‘something must be done’. Action can be expensive, and an investor can spend a lot of money in fees, many of them invisible, by trading unnecessarily.
Since December 2021 UK interest rates have risen 14 times, from 0.1% to 5.25% – the steepness of rises isn’t quite unprecedented – the graph of interest rates through much of the 1970s and 1980s looks more like a mountain range than anything else, and a precipitous one at that. However, interest rates are now 52x higher than they were a couple of years ago which is truly exceptional by any measure.
CPI (the Government’s preferred measure of inflation) has risen from 2% in July 2021 to as high as 9.6% in October 2022, and although it’s on its way down, is still stubbornly higher than the Bank of England’s 2% target.
Globally there are all sorts of political issues being thrown around, and generally the world is just becoming less ‘friendly’ right now, with almost every country becoming more protectionist, and less open to cooperating with neighbours.
Against this backdrop it is so tempting to feel that ‘something’, indeed ‘anything’ must be done to protect our wealth. Diversifying into gold, or crypto, real property perhaps, or simply keeping everything in a high interest savings account.
It is profoundly human to want to protect what we have when times are scary. But in the investment world it is also a dangerously misleading urge.
Taking action as a result of an emotional feeling about markets is usually counterproductive. If a portfolio is well designed, and well implemented then it will go down as well as up. That is not simply a regulatory statement, it is a true statement of reality. Volatility is not something to be scared of in isolation. Real returns above inflation come from taking risk and volatility is the ‘cleanest’ market risk that you can experience.
Of course, that isn’t a recommendation to take on high risk, as your plans may be shorter term, in which case volatility can be pretty destructive. But in and of itself, if your portfolio has dropped purely because markets are having a tough time, then selling out will probably do more harm than good.
At Walden Capital we build portfolios designed to capture returns from markets over time, through the use of primarily systematic investment building blocks, whilst being exposed to an agreed level of risk. We believe this is the best way for the majority of clients to meet their investment objectives. It does however require discipline, and most importantly, to avoid getting active! Other than on obstacle courses, of course.
