We doubt it’s news to any investors right now that multiple factors are contributing to turbulence in the financial markets year to date. It can cause concern when you consistently see and hear in the media that stocks are crashing, portfolios are down, and that we are headed for a recession later this year.
The hard truth is that unfortunately for now, there appears to be no let-up – equities are down, bonds are down, and inflation continues to creep up – which we understand is probably leaving you wondering what to do next. We’re here to guide you to sit tight and take a long-term view – because, generally speaking, now is not the time to panic and change your investment strategy.
Stock market disruptions and declines are completely normal, and historically, so are recoveries. Nothing in investing is ever guaranteed and no one has a crystal ball, but if you already have a diversified portfolio such as the ones we offer at OpenMoney, you are in a good position to watch your investments grow if you follow a minimum 5-year strategy.
Let us explain further and break-down what’s been happening in recent months.
Interest rates are up
In an attempt to reduce inflationary pressure, central banks around the world have increased interest rates. The idea being that with increased interest rates, people are not only encouraged to save more but also to reduce their consumption of goods and services, as it becomes more expensive to spend and borrow money to afford these purchases.
OpenMoney portfolios are diversified industrially and geographically to protect against factors such as these that cause market volatility. With that in mind, a significant proportion of your money is invested in the US market, so it’s important to consider what’s happening in the US economy, as well as ours here in the UK.
In the US, interest rates are currently at 1.5%, after a 0.75% increase in June. This is the sharpest rate hike since 1994 – and a further increase of 0.50% is expected in September. It’s predicted that it would not be until at least November that the central bank would revert back to 0.25% increases.
The Federal Reserve forecasts that by the end of 2022 the interest rate will be between 3.25% and 3.5% and by the end of 2023 close to 4%.
The Federal Reserve System is the central banking system of the United States of America.
Inflation continues to rise
The inflation rate continued to rise during Q2 (April to June 2022) with the Consumer Price Index (CPI) rising to 9.4% in June 2022. It means inflation in the United Kingdom has accelerated to a new 40-year high.
The Consumer Price Index is the official measure of inflation of consumer prices of the United Kingdom.
The Bank of England (BoE) has made it clear that tackling rising inflation is a key priority. In June, following the 0.25% interest rate rise, the BoE said it “…will, if necessary, act forcefully in response” to continuing inflationary pressure. The BoE have not given any more detail to that, but from past measures, we presume it means a greater hike in interest rates.
What does this mean for investors?
For equity market investors, the biggest concern of rising interest rates is their impact on economic growth. As interest rates increase, the economy slows as spending and consumption decrease. This makes it challenging for central banks - increasing interest rates to reduce inflation may well push economies that are already struggling into recession. The domino effect of people spending less and slowed economic growth is that businesses begin to struggle, and the value of stocks and shares decrease, affecting even the strongest portfolios.
Equity investors are now favouring ‘value’ stocks as opposed to ‘growth’. While global value stocks fell 4% over the quarter, global growth stocks fell much further by 13.4%. Research shows that value was the best performing factor during 2021 and continues to be in 2022.
Value stocks vs Growth stocks. Value investing and growth investing are two different investing styles. Usually, value stocks present an opportunity to buy shares below their actual value, and growth stocks exhibit above-average revenue and earnings growth potential. (Source: The Motely Fool, 2022).
Fixed-income markets also continue to struggle – as this is a direct impact of rising interest rates as when rates go up, bond prices fall.
Equity Markets vs Fixed-Income Markets. The major differences between equity and fixed-income markets are the types of securities traded, the accessibility of the markets, the levels of risk, the expected returns, the goals of investors, and the strategies used by market participants. Stock trading dominates equity markets, while bonds are the most common securities in fixed-income markets. (Source: Investopedia, 2020).
A Bond is a debt security, similar to an ‘I owe you’. Borrowers issue bonds to raise money from investors willing to lend them money for a certain amount of time. When you buy a bond, you are lending to the issuer, which may be a government, municipality, or corporation. In return, the issuer promises to pay you a specified rate of interest during the life of the bond and to repay the principal, also known as face value or par value of the bond, when it ‘matures,’ or comes due after a set period of time. (Source: Investor.gov, 2022).
While it all sounds dire, it’s key to keep in mind that downturn periods like this are completely normal and with a diversified investment portfolio you are in a good position to beat the volatility and gain in the long run. OpenMoney portfolios are diversified to include a mix of value and growth stocks across four asset classes – including equity and fixed-income markets – reducing risk and maximising returns by investing in independent areas that react differently to changes in market conditions.
Our ongoing advice to OpenMoney investors
The reason that we stress the importance of a minimum 5-year investment timeframe is because we know periods like this can cause concern, and in order for clients to give themselves the greatest chance to grow their investments, it’s essential to remain invested, stay calm and don’t react to short-term market events.
Taking a step back to review the data should provide some you with some comfort and reassurance that what seems like normality now, won’t continue forever.
If we look at the market data below spanning from the 1920’s to 2021, it’s clearly demonstrated that different asset types continue to trend upwards over time, despite a number of major market disruptions throughout history – including wars, pandemics and recessions. You can be confident that historically, markets have always recovered in the long-term.
The figures below show OpenMoney’s cumulative portfolio performance as of 30 June 2022. You’ll see from the data, that if you invested anytime within the last year from this date, your investments will be in a deficit. But once a significant period of time has passed, the value of long-term investing comes to fruition, and all portfolios are up by at least 5% after 5 years.
This will hopefully give you comfort knowing that time in the market when investing is better than timing the market. Our advice has always been, and continues to be, to trust the markets, resist sell-off and focus on the long-term.
That being said, if you would like some more reassurance in relation to your circumstances specifically, then we are more than happy to speak with you. Either email, call or message us on Live Chat and we can put you in touch with one of our financial advisers directly.
Whenever you invest, your capital is at risk and there’s a chance you may get back less than you put in.
Source: Betafolio Limited, 2022.
Remember, capital is always at risk when investing.