Last week, the media made much noise about a research report from the Royal Bank of Scotland (RBS) suggesting to “sell everything”. JP Morgan reportedly issued similar concerns. Even George Soros said in a recent speech: “When I look at the financial markets, there is a serious challenge which reminds me of the crisis we had in 2008”. Is it time to bail out from buy-and-hold investing? Is it time to move towards market timing? Let’s look at some facts.
What does the RBS report say?
RBS predicts a 10% to 20% decline in equity prices. They base their forecast on the following observations and opinions:
- China’s economic growth is slowing down
- Commodity prices are trending down
- “The world has too much debt”
- Automation will destroy 30% to 50% of jobs in the developed world.
Is a report like this unusual?
A report like this one is not unusual at all. All investment banks hire strategy teams – usually to provide forecasts to clients. Banks don’t have to (and most often don’t) follow the advice from their strategy group. The business objective of strategy teams is to get as much public visibility as possible. Some strategists are very timid in their predictions, pretty much forecasting the status quo. Some others tend to be very aggressive, either on the bullish or bearish side.
Why is this report attracting so much attention?
Global stocks have been struggling recently. At the time of writing, the MSCI All Country World Index has returned -7% (in Canadian dollars) in the first two weeks of 2016. Market declines like this are always difficult to handle and it is only normal that negative research reports will capture attention. Conversely, if markets had recently been trending upwards, these reports would be ignored by the media and the public.
Is the report’s forecast accurate?
The short answer is we don’t know. But we’ve never yet encountered any serious evidence that timing the market based on analyst forecasts can lead to higher returns than a simple buy-and-hold strategy. To the contrary, numerous studies have documented that market timing leads to poor returns.
What’s the market going to do in 2016?
While we can’t predict the outcome of 2016, we can share a few guideposts. First, stocks make money roughly two years out of three, which leaves 1/3 of years with a loss. According to one of the most comprehensive studies of investment returns, global stocks have produced a 5.5% real return (net of inflation) from 1900 to 2011, which we believe is not far from what can be expected going forward for those holding stocks for the long run.
Conclusion: What’s going to happen to your portfolio in 2016?
In this article, we have reaffirmed our long-held view that the only way to benefit from equity returns is to stay invested and avoid timing the market. It is also important to remember that investors holding a diversified balanced portfolio will not hold only stocks. For example, PWL portfolios typically hold between 40% and 50% in bonds, leaving the remainder in stocks. Nobody can predict when will be the next time stocks have a negative year, but the shock will be far less severe for those with a well-managed balanced portfolio.