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The enduring importance of long-term horizons and diversification

Since the start of the Covid-19 crisis, the financial markets have seen extreme volatility. Markets suffered significant reverses in late February and March, with weeks of record-breaking falls interspersed with occasional days of near-record rises. They then recovered ground in April and May.

Taking the FTSE 100 specifically, it was down just over 14 per cent on the year to date, sitting at 6484.30 at market close on 5th June. However, it had dropped as low as 4993.89 on 23rd March – that is a staggering 34 per cent drop on the year.

Of course, most advisers and clients will have seen falls before, but the recent volatility is more significant than we’ve seen in bear markets in the past.

The VIX index, a measure of US market volatility, hit an all-time record of 82.69 on 16th March 2020, beating the 80.74 reached in 2008 at the start of the financial crisis, after rising rapidly since the last weeks of February. On 5th June it closed on 24.52, which is still well above its usual levels.  On 2nd January 2020, for instance, it sat at 12.47.

Advisers will be seeking a framework to understand what has happened, the implications for investment strategies and how that relates to their advice for clients.

Being the voice of reason

The first question to ask is “do the fundamental principles to investing still apply?” Put simply, yes. A long-term investment horizon with appropriate diversification should see investors through this crisis and beyond.

We know that one of the most essential roles, which advisers are likely to have already played, is to urge clients not to sell out of their portfolios as far as possible, or to try to time this kind of market.

It is hardly surprising that clients will have been pushing for these types of responses given the sheer weight of bad news over a sustained period, coupled with the online financial media being more geared towards the daily decisions of market professionals than long-term investors.

Continuing to reassure clients in this period, providing them with information and helping them understand their own behavioural psychology, is essential to preventing rash decisions.

Addressing the drawdown challenge

Clearly, there are a different set of challenges for clients in accumulation compared with those preparing or actively drawing down on their investments for retirement.

Advisers will be helping retired clients and those approaching retirement to reappraise their withdrawal strategies in light of current circumstances. Many will be deeply concerned by their financial prospects and we know some people may even be considering delaying retirement. The situation is further complicated by the suspension of dividend payments by many companies.

As we exit lockdown, having the correct balance of assets including cash and a sustainable withdrawal strategy is likely to prove essential. This crisis has re-emphasised the importance of flexibility in retirement planning to avoid the need to sell down during a recession, albeit this is much easier said than done.

The market balance sheet

To date, much of the message will have been about what not to do. Advisers will now be considering the situation and what it means for investment strategies and related advice in the rest of 2020 and beyond.

When looking at the balance sheet of positives and negatives, we take a broadly positive view.

Starting with the negatives, there is continued uncertainty about the spread of the virus, and without a vaccine there is the possibility of a second wave and further lockdown restrictions globally.

Even without this, it feels like a long way back even to a new normal when we consider the UK has 8.4 million people on furlough and the US has seen more than 40 million job losses. Business finances are under huge pressure and consumer behaviour may take a long time to fully recover.

Economists continue to debate the extent of the damage and the shape and timing of the recovery, with talk of Vs or Ls and even swooshes.

But if that represents the wall of worry which markets must scale, there remain many reasons to be positive.

First, a massive, coordinated central bank intervention – in the Federal Reserve’s case measuring trillions of dollars – has put something of a floor under stock markets and provided liquidity to bond markets.

Alongside extensive government support for business, this could prove crucial as much of the world now moves fully out of lockdown.

Ultra-cheap money should begin to have a positive impact rather than just a stabilising one, allowing firms to recapitalise, repair balance sheets and begin to exploit recovering markets.

Markets are no longer as overstretched in terms of price to earnings and other significant ratios as they were at the beginning of the year.

We are also highly likely to see incremental progress on solutions for tackling the Covid-19 crisis, as we have seen in the past with the likes of HIV and Ebola.

All this suggests that, on balance, over the medium to long term markets will recover and we will move into a much more positive place.

Diversifying for resilience

Of course, in this intensely volatile situation the key will be patience, as well as to spread risk through diversification. It’s why we believe in the multi-asset fund approach and remain steadfastly focused on our robust management approach to our fund allocations*.

Given that we’re likely to see an uneven recovery, spreading allocations is essential. For instance, EValue continue to review our Horizon Funds’ strategic asset allocation on a quarterly basis to seek a spread of investments across world bond and stock markets to ensure effective diversification.

Focusing on the fundamentals

Ultimately, at times like this it’s important not to get wrapped up in the noise and confusion and re-focus on fundamental principles, which alongside an adviser’s financial planning expertise, should help keep clients’ long-term plans on track.

Read further articles via our insights page.

*The Horizon Multi-Asset funds have a three-layer process.

  1. Embark Investments oversees the management of all five funds. It also actively monitors each portfolio to ensure it is managed in accordance with its investment strategy and investment limits.
  2. EValue provides the investment framework with forward-looking asset allocations. The weightings are aligned to five risk profiles and Asset Allocations are updated on a quarterly basis.
  3. Columbia Threadneedle then overlays its own views on asset allocation with those produced by EValue. They select the right mix of underlying funds for each risk profile and actively manage the underlying funds to reflect where they believe the best opportunities lie.

If you require further information on any of the Embark Horizon Multi-Asset Funds, the Key Investor Information Document (KIID) and the prospectus are both available on the website Horizon by Embark is the trading name of Embark Investments Limited which is the Authorised Corporate Director of the Embark Investment Funds ICVC. Embark Investments Limited is authorised and regulated by the FCA. Registered in England and Wales under registered number 3383730. Registered Office: 100 Cannon Street, London, EC4N 6EU.

Past performance is not necessarily a guide to future performance and the value of investments (and any income from them) can go down, so an investor may get back less than the amount invested. No guarantee is given for the performance of the fund.

The information, materials or opinions contained on this website are for general information purposes only and are not intended to constitute legal or other professional advice and should not be relied on treated as a substitute for specific advice of any kind.

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Although we make reasonable efforts to update the information on this site, we make no representation warranties or guarantees whether express or implied that the content on our site is accurate complete or up to date.

About the Author

Thomas is the new CEO of Horizon by Embark, following Embark Group’s acquisition of Zurich’s Authorised Corporate Director (ACD) & Investment Management (Zurich Investment Services (UK) Limited) businesses on 1 May 2020. Thomas has more than 30 years’ experience in asset and wealth management, including positions as Head of Global Fund Distribution at Fortis Investments and Managing Director Investment Management with Barclays Wealth.

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