Fund investing: Why the turbulence is more memorable than the landing

Last year may have been a bumpy ride for investors but, says Skandia Investment Group’s Ryan Hughes, it is important to learn lessons from a volatile journey.

There are almost too many old adages when it comes to investing but 2011 was the year that reaffirmed the importance of diversification. The last 12 months proved to be the proverbial rollercoaster ride for investors, but unlike other volatile periods over the past few years, 2011 proved to be volatile almost regardless of which asset class investors had exposure to whereas previously most volatility had been confirmed to equity markets.

It was a year of two halves, with the first half favouring equities and the second half anything but. However when the referee blew the final whistle on 30 December, equity markets on the whole actually had not done anywhere near as badly as many were probably feeling, with the MSCI World Index only down 4.8%.

The investment journey

This ‘feeling’ is something I like to call the ‘investment journey’ and I use it to explain the experience of the investor when they are invested in a fund. Interestingly, the more I talk to investors, the clearer it becomes that many remember the ‘journey’ far more than the destination/outcome. To put this a different way, I am sure you can all remember a very bad, turbulent flight that you have been on.

As time passes, where this plane was heading and what you did when you arrived have probably faded into the deeper reaches of your memory. But, if you are anything like me, the experience of the flight is as clear a memory as you could possibly have and you can still describe it in vivid detail.

Years like 2011 will prove to be like one of those bad flights, a deeply volatile experience but actually the outcome was nowhere near as bad as it could have been.

It is these types of experiences that Cautious Managed funds (or Mixed Investments 20% – 60% Shares funds as the IMA snappily now calls them) aim to make more comfortable.

However, 2011 showed that even some of the world’s ‘safe havens’ can prove to be the undoing of even the most cautious of investors. This was no better demonstrated than by the ultra cautious, sleepy nation that is Switzerland, who managed to wipe 10% off the value of the reliable Swiss franc in one fell swoop in August by pegging to the euro once it realised that too many people were using it as protection against the global economic crisis and this, in turn, was making its economy less competitive.