investing and your emotions...investing and your emotions | 3 making the most of your money is about...

INVESTING AND YOUR EMOTIONS

2 | Investing and your emotions

CONTENTS

03 Introduction

04 Investing returns

06 Diversification matters

07 Markets are cyclical

08 Remembering compounding

10 Know yourself

11 Keep things in perspective

11 Get support when you need it

Investing and your emotions | 3

Making the most of your money is about making the most of your future. So it’s inevitable that investing can sometimes be an emotional experience.

INTRODUCTION

This is provided by Alliance Trust Savings for general information only. It is not a recommendation to buy or sell. It is provided solely to support you and your financial adviser. The value of investments can go down as well as up and you may get back less than you put in. Past performance is not a guide to future performance.

Your financial adviser is there to recommend a plan of action that is suitable for you, depending on your own individual circumstances. Alliance Trust Savings does not give financial or investment advice.

Please be aware that the value of investments can fall as well as rise, so you could get back less than you invest.

Tax treatment depends on individual circumstances. Laws and tax rules may change in future without notice.

Your emotions may be positive or negative, depending on how your portfolio is performing and what you are hearing in the news. But, however you are feeling, your financial adviser is there to help, and there are also a few general rules of thumb to keep in mind when you find yourself questioning what to do next.


INVESTING RETURNS

A 2019 study found that, since 1899, UK-listed shares have returned 4.9% a year in real terms, compared to 1.3% for gilts and 0.7% for cash. It also found that an investment in shares kept for five years at any stage since 1899 has had a 76% chance of outperforming cash and a 72% chance of doing better than gilts. For 10 year periods that rises to 91% and 77% respectively1.

Looking at the global picture, based on the MSCI World Index between 1970 and 2019, another study found that the longer you stayed invested during that period, the more likely you were to see positive returns2.

60

Retu

rn (%

)

40

20

0

-20

-401 year periods

Source: Tilney

3 year periods 5 year periods 10 year periods

Since 1899, UK-listed shares have returned 4.9% a year in real terms, compared to 1.3% for gilts and 0.7% for cash.

4.9%

1. Moneyweek – Stocks beat cash and bonds over the long-term – 19 April 2019.2. Tilney – It’s about time in the markets, not timing the markets – 17 October 2019.

Lowest return Highest return

-30.27-16.33

33.65 30.49 23.69

0.21-5.41

56.24

It’s time in the markets, not timing the markets

Cash in the bank provides a useful buffer to cover essential outgoings and for emergencies. But it can lose value to inflation over the long term and offer little in the way of growth. In fact, history shows that market-based investments have generally performed better over time.


2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018

Commods 21.4%

Property 45.9%

Gold 31.8%

Cash 4.4%

High yield bonds

21.4%Gold

29.3%Gold

11.1%Property 32.2%

Stock market 21.4%

Property 32.2%

Property 1.4%

High yield bonds

14.8%

Stock market 23.1%

Cash 1.7%

Gold 17.0%

Gold 23.8%

Commods 16.2%

Gold 31.1%

Property 42.8%

Commods 16.8%

Inv grade bonds 5.2%

High yield bonds

19.3%

High yield bonds 8.0%


Cash 0.3%

Commods 11.8%

Property 22.5%

Inv grade bonds -1.7%

Property 15.0%

Stock market 20.7%

Stock market 9.6%

Inv grade bonds

-4.7%

Stock market 30.8%

Property 16.6%


Stock market 16.5%

Property 3.7%

Stock market 5.5%

Inv grade bonds

-0.2%Gold 9.0%

Gold 12.6%

Gold -1.7%

Stock market 10.0%

High yield bonds

13.5%Cash 5.4%

High yield bonds

-27.9%Gold

27.1%High yield

bonds 13.9%

Cash 0.3%

Inv grade bonds

10.8%Cash 0.3%

Cash 0.2%

Stock market -0.3%

Stock market 8.2%

High yield bonds

10.2%

High yield bonds

-3.3%


Cash 4.6%


Commods -35.6%

Commods 18.9%

Stock market 12.3%

Stock market -5.0%

Gold 5.6%


High yield bonds

-0.1%

High yield bonds

-4.2%


Inv grade bonds

15.2%Property -6.2%

Cash 2.6%



Stock market

-40.3%

Inv grade bonds

16.3%


Property -9.9%

Cash 0.6%

Commods -9.5%

Gold -1.8%

Gold -10.4%

Property 2.5%

Commods 1.7%

Stock market -8.2%


Commods 2.1%

Property -5.1%

Property -50%

Cash 1.3%

Cash 0.3%

Commods -13.3%

Commods -1.1%

Gold -27.3%

Commods -17.0%

Commods -24.7%

Cash 0.6%

Cash 1.0%

Commods -11.2%

DIVERSIFICATION MATTERS

Some assets will perform better than others at different points in time. That’s illustrated by this research3 looking at returns from various asset class indices from 2005 to 2018.

By investing in more than one type of asset you are more likely to have some investments still performing positively when others are experiencing a down-turn. This can help to manage your risks and smooth your investing journey over time.

Selecting the right mix of investments for your time horizon and risk profile (representing the level of risk you are willing and able to take with your money) will help keep you on track towards your goals and is one of the key services your adviser can provide.

Worse performing asset class

Best performing asset class

3. Schroders – 14 years of returns – 19 March 2019.

Source: Schroders


Anyone investing for the long-term will experience the ups and downs of market cycles, because they are a fact of life.

MARKETS ARE CYCLICAL

A cycle is comprised of expansion, peak, contraction and trough, with the decade since the 2008 financial crisis (the most recent trough) characterised by a long expansion. We can never predict exactly when one stage of the cycle will end and the next will begin, but we can be reasonably confident that down periods will be followed by better times.

Recovery periods can be especially profitable for investors who kept putting money in through tougher times. That’s because your money buys more units of an investment when prices are lower, meaning you have more to benefit when they rise.

Time

GDP Peak

Contraction Expansion

Trough Peak



The fact there are no guarantees when it comes to investing – other than there will be ups and downs – might suggest that anyone able to avoid the downs and only invest during the good times could do particularly well.

REMEMBER COMPOUNDING

However trying to predict exactly how investments will perform, and when, is extraordinarily difficult, even for investment professionals. If growth is a priority for you, staying invested for the long term and looking to harness the snowball effect of compounding by reinvesting dividends may be a more reliable strategy.

Over the 10 years to 2018 the FTSE 100 generated a compound return of 8.8% a year when dividends were reinvested, a total return of 121%4. And you can see the difference compared to when dividends where not reinvested.

4. IG.com – What are the average returns of the FTSE 100?

2009 2010 2011 2012 2013 2014

Total FTSE 100 return with dividends reinvested (%) 27.3 12.6 -2.2 10.0 18.7 0.7

Total FTSE 100 return without dividends (%) 22.0 8.9 -5.6 5.8 14.4 -2.7

2015 2016 2017 2018Ten year

annualised return

Total FTSE 100 return with dividends reinvested (%) -1.3 19.1 11.9 -8.7 8.3

Total FTSE 100 return without dividends (%) -4.9 14.4 7.6 -12.5 4.3

FTSE 100 performance over the last ten years

Source: IG Bank

Source: Barclays

Investment guru Benjamin Graham once wrote that “the investor’s chief problem – and even his worst enemy – is likely to be himself”5. Much like the markets, investor emotions can run in cycles too6. Investors can pay the price of making knee-jerk decisions when markets fall, being over-confident when they are rising and even being too cautious as a result of previous experiences and losing out on long-term growth as a result.

KNOW YOURSELF

5. Quoteswise.com – Benjamin Graham Quotes.6. Barclays – Understanding the cycle of investor emotions – 26 November 2016.7. Investopedia – Prospect Theory – 9 July 2019.

The cycle of investor emotions

Investors tend to feel the pain of losses more than the pleasure of gains of the same size, academic research suggests, making them risk averse to a degree that can be out of proportion to the expected outcome7, So if you’ve incurred losses in the past you might be more tempted to avoid market-based investments in future, despite their typically positive long-term returns

Working with your financial adviser is one way to help you manage your investing emotions. They can keep you focused on the facts and your long-term goals, ensuring that each decision you make contributes towards keeping your portfolio on track.

“the investor’s chief problem – and even his worst enemy – is likely to be himself”.Benjamin Graham

Reluctance

Optimism

ExcitementExuberance

Denial

Fear

Desperation

Panic

CapitulationDespondency

Depression

Apathy

Indifference

Reluctance


UK investors have money in thousands of funds and investment trusts, the vast majority of which never encounter crisis or controversy. But when a famous fund hits the headlines for all the wrong reasons, it can cause shockwaves.

KEEP THINGS IN PERSPECTIVE

The closure of Woodford Investment Management in October 2019, a few months after trading in the firm’s flagship fund was suspended was an unusual event. Investment managers operate in a highly regulated sector overseen by the Financial Conduct Authority, which monitors companies closely for any signs of difficulties. Suspensions and firm closures are rare, particularly on the scale of Woodford Investment Management.


GET SUPPORT WHEN YOU NEED IT

Financial advisers know the market well, keep up-to-date on developments and will be able to help you make decisions and take actions on your investments where necessary. If you ever have questions about what’s in your portfolio and whether it’s still right for you, they should be your first port of call.

PS ATS GEN A 0181 (11278)

Alliance Trust Savings Limited is registered in Scotland No. SC 98767, registered office, PO Box 164, 8 West Marketgait, Dundee DD1 9YP; is authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and the Prudential Regulation Authority, firm reference number 116115. Alliance Trust Savings Limited gives no financial or investment advice. ‘Alliance Trust Savings’, ‘ATS’ and ‘AT Savings’ are all brand names of Alliance Trust Savings Limited together with the ‘Alliance Trust Savings’ logo are owned by and used with the permission of Alliance Trust PLC, the previous owner of Alliance Trust Savings Limited.

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investing and your emotions...investing and your emotions | 3 making the most of your money is about...

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