By David Macfarlane, Director, Discretionary Wealth Management, HSBC Asset Management
We know there is an opportunity cost from not investing, particularly given the current inflationary pressures, but it’s important we help clients understand that short-term worries about market volatility shouldn’t override their long-term objectives.
Einstein is rumoured to have said that ‘compound interest is the eighth wonder of the world – he who understands it, earns it…. and he who doesn’t, pays it’. The simple message is, when it comes to investing, regardless of how volatile markets may seem, the earlier investors can start the better.
We ran a study1 that compared two investors, each saving $1,000 dollars a month. One started in 2004 and the other in 2007. We ran it to the end of 2021.
The investor who started in 2004 saved an extra $36,000 dollars into their pot (by starting three years earlier), but by the end of 2021 the earlier investor had a pot worth $133,000 dollars more – having only put in an extra $36,000 dollars. A great example of the power of compounding and the difference a delay in starting could cost in the long run.
But what about the worries your clients have of staying invested during falling markets? The amount of cash in a savings account doesn’t really change from one day to the next so we feel in control of it, even if we aren’t seeing the impact of inflation on purchasing power. However, Benjamin Graham, author of ‘The Intelligent Investor’ advises us that ‘you will be much more in control if you realise how much you are not in control’.
We can’t control markets but by focusing on risk profiles, asset allocation, fulfilment and cost, and filtering the noise, we look to deliver strong risk adjusted returns, as we know these factors are key in driving long-term returns.
Napoleon said, “A genius is the man who can do the average thing when everyone else around him is losing his mind.” Does ‘do the average thing’ mean remain invested? In many instances, yes.
We looked at what would have happened if an investor had put $100,000 dollars into a basket of global equities from 2005 – 2022. Over those 17 years, just leaving things be, gave an average annual return of 8.1%.2
We then stripped out the top 20 days in that 17-year period. These accounted for only 0.3% of the total number of days but, crucially, by missing those 20 days in that 17-year period, returns dropped from an average 8.1% per year to 1.8% a year. This means that by missing the 20 best trading days, the final balance would have reduced from $380,000 to just over $136,000. It’s simplistic, but this example helps highlight why it’s often important to remain invested, even during periods of volatility.
Given the speed at which information flows around the globe these days, we often lose sight of the longer-term picture and spend time focussing on the here and now. We can check markets on our smartphone 24 hours a day, fretting that markets have fallen, forgetting why we’ve invested in the first place.
So, when volatility picks up, it’s important to communicate to clients how time can be the most powerful force in investing and remember the thoughts of Einstein, Graham and Napoleon.
The HSBC Global Strategy Portfolios are HSBC Asset Management’s flagship multi-asset solution for Advisory clients. The range includes five funds, tailored to different investor risk attitudes and diversified across key asset classes and global regions, including developed and emerging regions. Visit www.assetmanagement.hsbc.co.uk to learn more.
[1] Source: Bloomberg, HSBC Asset Management. Investing = MSCI AWCI Net Return Index, 1 January 2004 to 31 December 2021.
[2] Source: HSBC Asset Management, Bloomberg, Returns are for developed markets stocks – MSCI World Daily Total Return Gross World Index, as at January 2022
For Professional Clients only
The material contained herein is for marketing purposes and is for your information only. This document is not contractually binding nor are we required to provide this to you by any legislative provision. It does not constitute legal, tax or investment advice or a recommendation to any reader of this material to buy or sell investments. You must not, therefore, rely on the content of this document when making any investment decisions. The value of investments and any income from them can go down as well as up and investors may not get back the amount originally invested. Approved for issue in the UK by HSBC Global Asset Management (UK) Limited, who are authorised and regulated by the Financial Conduct Authority. Copyright © HSBC Global Asset Management (UK) Limited 2022. All rights reserved. ED 3849. 31.07.2023.
