Golden rule number one – invest, don’t speculate

When investing, there are clearly many different approaches and strategies. At Moore Stephens, we advocate five golden rules which, if adhered to, should help any investor enjoy a more favourable investment experience.

The first of these golden rules is invest, don’t speculate.

Following the worst quarter of equity performance since 2011, investors around the world are wondering whether now is a good time to invest. There are plenty of opinions in the press or in city firms, with strong views one way or the other, but can you really judge whether a stock or an index is under or over-priced at any one time?

We have seen plenty of volatility across all global equity markets in recent months and years. The UK’s headline index, FTSE 100, has fluctuated between a 10 year low of 3,530 in March 2009 to an all-time high of 7,089 in April of this year. So, the question is – how do you assess fair value? And is the current market level good or poor value?

It’s easy with hindsight to say that stock market values in 2009 were clearly undervalued, but given all the doom and gloom in the press at that time, with talk of 1930’s depression, were you confident enough to act and invest your hard-earned savings at the time?

In reality, the current price of the FTSE 100 (or, indeed, any openly traded market or share) always reflects all of the presently available information. So whatever the current crisis, whether it’s China, or Volkswagen, or Brexit, the information has already been digested by the market and is reflected in the prices quoted.

Whenever there are any sudden sharp rises or falls in prices, it is nearly always due to the emergence of completely unexpected factors, which, quite simply, because they were not expected, have not been accounted for in the price (such as the recent Volkswagen story). Therefore, with millions of market participants acting on every new piece of information, it is impossible to consistently gain any advantage before the markets digest any new information and price it in.

So anyone trying to predict changes in market movements, is simply speculating on future unforeseen events. As one famous person once said, “it’s tough to make predictions, especially about the future”.

In contrast, our approach to investing takes the gambling and speculating out of the investment equation. Over 50 years of academic evidence has shown that the majority of your investment returns (up to 95% according to numerous academic studies) are dictated simply by which asset class you are invested in, so, not from speculative stock-picking or predictive market timing, as so many of the pundits would have you believe. Over the long term, you should construct an investment portfolio that reflects your time horizons, your tolerance to risk and volatility and ensure that you do so in a structured and diversified manner. Do not be tempted to divert from your long-term goals by short-term speculation or press comment, stick with it.

As the first of our five golden rules states:  invest, don’t speculate. Look out for our next bulletin in which we will be highlighting our second golden rule.