Market uncertainty and investment myths – an assessment
The current economic environment is characterized by uncertainty and fear. This scenario not only influences the investment behavior of market participants but also encourages half-truths about investing. Franco Dorizzi, who leads the wealthy families department in German-speaking Switzerland for Credit Suisse, gives us his take on some common investment myths.
The markets are currently highly volatile as a result of the war in Ukraine, high inflation, rising interest rates, the risk of recession, and supply chain difficulties that persist despite improvement. Investors tend to become unsettled during times like these and look for anchor points, which they find in abundance in articles and market commentaries. However, not everything that is published is conducive to long-term wealth creation.
Mr. Dorizzi, in these uncertain times, the phrase "cash is king" is on everybody's lips. What are your thoughts on that?
Franco Dorizzi: In my view, liquidity is only king for the portion of the assets that is needed for regular expenses and emergencies. So I agree with the statement to that extent. I have a different view, however, when it comes to the portion of the assets that is not needed either immediately or in the short-term future. In Switzerland and other countries, inflation is currently outstripping interest on account balances significantly and is therefore continuously stifling purchasing power. This is why we advise our clients to invest the portion of their liquidity that is not needed in the medium to long term on the financial markets based on their individual risk profile. Even in the lengthy preceding period of low inflation, purchasing power was lost with liquidity in Swiss francs.
What other general observations have you made about popular investment myths? And how can we deal with them?
We notice that many new investors are very active and expect to outperform the market with stock picking. This is not recommended. Firstly, frequent trading activity has cost implications in the form of the associated fees. And secondly, many studies demonstrate the importance of strategic asset allocation and adherence to an individually defined strategy. More than 80% of the portfolio return stems from good asset allocation. Selecting the right equities and buying and selling at the right time together account for just 15% of the return.
Sticking to your individual strategy also means that you avoid the risk of not being invested during certain phases. Emotions, herd mentality, and negative reports in the media can tempt investors to sell everything and to deviate from their own strategy by trying to influence the timings of entries to and exits from the market. In reality, though, it is almost impossible to catch just the right moment. Emotions can cause investors to make poor decisions. We therefore consider it far more important to be permanently invested, true to the old stock market adage: "Time in the market is better than timing the market." And there is plenty of factual information to back up this strategy.
We have analyzed the performance of the SMI (SMIC, Swiss Market Index SMI® Total Return) over the last 20 years. The yield for an investor who was permanently invested during this period would have been 220%. Excluding the five best days, it would have dropped to just 123%, and without the best 15 days only 28%. The fact is that the best trading days have often taken place after severe setbacks, and thus precisely when some market participants have left the market due to panic instead of sticking to their strategy.
Is it true that many investors manage their assets themselves because they believe they can do a better job than financial professionals?
In our UHNWI team, we serve very discerning investors with exacting requirements. Many of them manage the majority of their investments themselves, while others entrust the management of their assets to the bank. Clients with a good understanding of the market and the necessary time successfully manage their assets themselves and, if necessary, outsource management for certain areas. However, evaluations show that a significant majority of self-managed portfolios deliver worse performances than our discretionary mandates when faced with comparable risk.
Having a systematic investment approach, making emotion-free investment decisions, and having access to the constant monitoring of global events on the markets pay off in terms of the advantages they bring. I would also recommend having your assets managed by professional teams if you do not have the necessary expertise or the access to investments – with alternative investments such as private equity and private debt, for instance, or very specific niche sectors such as biotech, agritech, robotics, and other trending topics.
And what advice do you give your children?
The same advice I give my clients – although my clients are a little older, of course: Start early with savings through equity investments. Regular and systematic investment really pays off even with small amounts, such as with an equity fund savings plan. The time and the compound interest effect work wonders (they are the eighth wonder of the world, as Warren Buffet so beautifully puts it). With this approach, parents can build up wealth for their children over many decades.