Andrew Hannay, Director at Edinburgh based IFA RobMac comments on the fickle nature of markets and how to explain them.
“As a youngster I always remember listening to the financial news on the radio and being surprised when commentators described investment companies as “being nervous” or “having the jitters”. Surely these powerful institutions wouldn’t experience the same weaknesses as us mere mortals! Forty years later and having spent my working life in the financial sector, I now know better.”
Indeed, we still hear terms like “markets being fickle” despite all the expertise, experience and technology to help make sound investment decisions. Only yesterday, with the announcement of a COVID-19 vaccine being imminently available, did the markets react.
All the companies that had suffered greatly in the last 9 months such as travel and airlines boosted their share price significantly, while the companies that benefited from lockdown such as Zoom and Peleton saw their value plunge.
All on the announcement of a drug that still has to be implemented over the next 6 months or so and perhaps a return to some sort of normality by Q3 of 2021. One company’s proclamation sent the FTSE up by 5%, the Dow Jones by a similar amount and the Nasdaq (where tech companies live) down by 1.5%.
Andrew believes that the reasons for such swings are quite complex. “We have to factor in what people want to believe in their calculations. For example, if a person believes that climate change is likely to have a detrimental impact on world markets, then they might want to invest in renewable energy companies. But that belief may influence their decision-making process because they want change to take place.
Equally, the current pandemic – which is still less than a year old – may influence the short term thinking of investors and make them deviate from their long-term goals. Reacting to the unknown is often another factor in the investment process.
It’s difficult not to be swept up in the daily news feeds that we all experience when we like it or not.
Our advice to our clients has always been to take a medium to long term position with regard to investments. Looking at your portfolio on a daily basis will only cause anxiety and unease and possibly lead to “the jitters”.
Markets do react to news, but yesterday’s announcement that sent Zoom’s share sliding does not make it a bad company overnight. As life returns to normal and we adopt different working practices, Zoom will undoubtedly bounce back and regain its losses over time.
Trying to second guess the fickle nature of markets is a mug’s game more akin to gambling than a sound investment plan for the future.
We often talk about the expertise and experience of RobMac when talking with our clients ,but I think perspective is an important factor too. Having the ability to look back over a longer time frame and see portfolio growth despite the ups and downs during a 10-year cycle is reassuring and essential in investment decisions.”
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