Don’t listen to RBS

In the last couple of weeks, I have been inundated with invites to attend seminars and webinars from fund managers on their global outlook for 2016. They all have a different story to tell as they try to be the ones who can say “I told you so” at the end of the year. For those who got it wrong, they will just pretend they didn’t make any predictions at all. What did catch my eye was RBS’s European Rates Research Note (if you can call 55 pages a note) to its clients. In it they say:

The downside is crystallising

Watch Out

Sell (mostly) everything

The game is up

The World is in trouble

Sell everything except high quality bonds

As we said into the credit crunch in 2008, this will be as much as limiting losses as making gains

There are a number of issues to look at from that note:

Information versus Noise

Markets are frenetic, energetic, ever-changing entities that require people who are actively involved in them to be constantly plugged in and switched on. But this does not mean that as an investor you must be too. This is a mistake many investors make – believing that to be a successful investor they must have their finger on the pulse all the time.

The investment management industry and financial press perpetuates this myth with daily chatter that offers rolling tips, predictions, warnings, speculation and advice. This material is produced by competitive media and fund sales industries that survive by attracting attention to themselves. There is no doubt that RBS’s note has attracted an awful amount of press, which is probably what they are looking for.

Investment Discipline

Investing is often likened to a ride on an emotional roller coaster. If you consider the typical behaviour of the vast majority of investors, you can understand why. When an upward trend emerges, investors follow the trend but only buy-in once they are convinced that it is for real. Unfortunately, this can be close to the point that all the gains have been had and the trend reverses. Too often, it is emotions that drive investors and the result is that they can buy high and sell low. The solution is to invest without emotion. This can be achieved by the use of a portfolio of globally diversified funds, tempered with a fixed income component to reduce volatility. This allows an investor to stay invested at a risk level they feel comfortable with and minimise the urge to move.

Consistency Beats Volatility

For most investors, the emphasis placed on maintaining discipline by professional investment advisers is interpreted to mean: stay with the strategy even when times are bad. In fact, recent history shows it was exceptionally good investment returns, such as those experienced during the tech stock bubble of the late 1990s, rather than adverse market conditions that proved the biggest challenge to staying with the programme.

It is often said that the two conflicting emotions that rule investors are fear and greed. But we must add to that the basic human instinct for “belonging” and “acceptance”. In other words, if your peer group appears to be making a fortune from the latest hot stocks, you not only feel that you are missing out (greed) but also that you are not one of the in-crowd (acceptance).

Any investors who find themselves challenged in this way should take comfort from the mathematics underpinning the concept that consistency beats volatility and that a globally diversified portfolio of “boring” index funds will beat the “exciting” hot stocks over the long-term.

Diversification is Essential

Diversification is the principle of spreading your investment risk around. Your investment portfolios should therefore hold the shares and bonds of many companies and governments in many countries around the world. This will mean the negative and positive influence of each individual investment is reduced, producing, on aggregate, less risk in your portfolio.

If you have any questions, you can contact me directly at