Partner Article

Richard Clark and Simon Patterson from Barclays Wealth explain ‘why August is the month of anxiety’

Since our last blog post at the beginning of August, it’s clear to see that market volatility is still high, however we are cautiously optimistic that markets will stabilise in the fourth quarter, once we are out of the ‘summer’ season.

A well-known aspect of financial markets is that the more frequently returns are monitored, the higher proportion of losses are seen. The stock market appears risky when judged on a one month period, compared to one year or five years, when the asset can seem safe. During periods like August, the heightened feeling of short-term uncertainty, and the fear it triggers, can stimulate the market.

When markets become unpredictable, investors feel an urge to do something. We label this behaviour ‘the desire for action’, and it’s not solely reserved for investments, it’s often seen on the football field too…

When faced with a penalty kick, it has been found that keepers jump to either side of the goal 94 per cent of the time. However, shots go to the centre 29 per cent of the time, implying that keepers could have done better by doing less. We see similar effects in portfolios of individual investors – the more they trade, their net return worsens.

This desire for action is often motivated by fear, and we have found that fear can be self-fulfilling in financial markets: expectations are so important. But for those who believe that markets represent “the wisdom of crowds” – the lesser of all evils when it comes to forecasting tools – it should be remembered that they can be wrong too.

In times of volatility not only is our investment strategy tested, our emotions and control also come under scrutiny. This is why we place such an emphasis on behavioural finance in our client work, and having a unique understanding of risk appetite.

When crafting a portfolio, it is important to consider its performance in good times, bad times and your reaction to volatility. The past weeks have shown turbulent markets offer benefits and dangers – and one of the main dangers is in our response.

As we are seeing at the moment, with nominal yields on 10-year US Treasuries, gilts and bonds at the lowest levels in our working lifetimes (and longer), it is tempting to think that the markets are telling us that a major downturn is indeed at hand. But it could be investor sentiment, not the economy, which is volatile.

Again, this is why we never underestimate the importance of understanding our clients and how they react to market movements. The unique Financial Personality Assessment (FPA) we carry out with clients provides an insight into additional characteristics such as composure, which in turn allows us to be proactive with clients who we know have low composure during times of market uncertainty.

As always, we do emphasise that investing in shares is not for everyone. Their value can fall and you can get back less than you invest – if you are unsure, you should seek independent advice.

Richard Clark and Simon Patterson joined Barclays Wealth Newcastle at the beginning of the year as Private Bankers and are focused on providing wealth management advice to new and existing clients, as well as establishing relationships with local businesses.

This was posted in Bdaily's Members' News section by Richard Clark .