Mike LeGassick is a director and behavioural investment coach at Manning & Company, a long-established financial advice practice based in Ivybridge, Devon. LeGassick recently joined us on The Leaders Council Podcast to discuss the current volatile economic situation and the importance of investors being able to manage their behaviour and emotions to avoid making costly decisions.
In the investment world, volatility – the rate at which the price of a stock increases or decreases over a period - is something which can often deter or even spook investors, often leading to them making rash choices that can prove damaging to their capital, sometimes permanently.
Despite the ongoing inflationary pressures, which can be in LeGassick’s own words ‘a silent assassin’ for investors, the investment guru emphasised that tricky times would pass and there is value for investors in waiting such periods out.
LeGassick said: “The most important thing that investors should be doing now, as difficult as it is, is trying to manage their emotions and behaviour around what's going on at the moment. I have always tried to instil in my clients that tough times will come and go. Albert Einstein once said that ‘history doesn't repeat itself, but it often rhymes.’ We're in one of those very, very difficult global economic downturns right now.
“There's an awful lot going on, you could call it a perfect storm, I guess. I think if anyone had forecasted a few years back what we’d have gone through in the last few years, they’d probably be laughing about being right from the confines of a padded cell! It's unbelievable what's going on. But 70 per cent of what I do with my clients is manage client behaviours. That’s about making sure they don't do the wrong things at the wrong time for the wrong reasons.”
Part of the reasons behind why investors may make such snap decisions that could prove costly, according to LeGassick, is around a bias that humans have as investors known as ‘recency bias’.
“My clients are predominantly ‘rest of life’ investors, so they’re investing up to and throughout retirement. Usually, you see them starting from say their mid-50s up until their late-80s, so that’s a 30-year period. The problem that many clients are understandably going through right now is one of all the biases that humans have as investors. The prominent one right now is something called ‘recency bias.’ They're going to be affected by it, whether they know it or not, unless they're very experienced investors.
“Recency bias is basically basing everything what's going on right now. Getting sucked into that mindset that ‘this is the way it's going to be permanently.’ So, there are basically short- and long-term decisions being taken on what's happening right now. Now, judging your decisions solely on what's been happening recently, hence, recency bias, is a very dangerous thing to do. Because people try to get in and out of the market consistently at the best times to try to get an edge, and that is impossible to do well consistently. Nobody can time the stock market for the best returns. Even the great Warren Buffett admittedly can't do that.”
However, managing people’s behaviours to be patient around their investments is not an easy thing to do. Indeed, LeGassick admitted that some of the work he was looking to do on behaviour around investment actually goes against human nature itself.
“If you've got your retirement savings, all put to one side, and you see that your monthly values are going down, you aren’t going to be happy and you’re likely to make a rash reaction. Unfortunately, we are not hardwired to be good investors, we tend to panic. When I ask my clients what they think the biggest mistake investors make tends to be, and most of them say, ‘oh panicking’, I think that panicking is too broad a term.
“I think you need to look at what causes the panic. Nine times out of 10 it relates back to the rollercoaster analogy. The biggest cause of panic for investors is confusing volatility with the permanent loss of capital. Hence, the roller coaster analogy, the big dips, the loops, the highs, and the lows. All of that is volatility. But at the end of the rollercoaster, you get out and either queue up again or you never get on it again in your life. But if you’d panicked mid-loop and tried to get out, you’d be looking at a permanent loss. So, you don't get yourself out of the roller coaster when you are upside down in it. The same goes for the markets.
“This analogy is where a lot of people are right now. I send clients one or two newsletters a month and it's not really all about market commentary. It's more about managing the behaviour and sticking to the long-term plan. Thankfully, my phone's not been ringing with people ready to jump off the ledge. So, I like to refer to my updates as a regular shot of sanity. Because as time moves on, they'll tend to get it. They need to focus on what they can control and try to detach themselves from things that they have no control over, such as the economy.”
LeGassick elaborated further by stressing to listening investors that like all difficult times, the current economic situation would pass, and the markets would once again begin to recover and rewards would be there for the taking.
“The four most dangerous words in investing are ‘this time, it's different.’ Well, it's not different. It just feels that way, a lot of the time. But this too shall pass. If you look at all these major events, where markets have fallen 20, or 30 per cent, and then you look at the history of what markets have done in the subsequent five to 10 years, you generally see significant gains. So, the people that get rewarded are the ones that are resolute and do stick to the plan.
“Now, that doesn't mean that clients don't have to change their plans, particularly with the cost-of-living raging and sometimes I do tell clients they may have to pull their belt in a little bit and tell them things they don’t want to hear. Looking at things like cash flow, modelling, what they're spending per month, and how they can reduce their costs, is part of my work. Covid was a great example of where we had to do this. In managing behaviours, as financial advisors we need to ensure our clients are managing their accounts in the appropriate manner based on the underlying circumstances. So it's a constant education, constant monitoring, and making sure clients clearly understand that they need to contact me if they ever have a wobble or a change in opinion.”
Sharing his perspective on where investors ought to be looking to pool their money in volatile periods, LeGassick advised that diversification in investment portfolios was key for long-term returns.
“A lot of people run to gold in times like this as an asset class. Warren Buffett's not a big fan of it and I'm not a big fan of it personally. It comes down to the size of client portfolios, how diversified they are. We all know that globally, we're having a tough time. But there are always winners as well as losers. A classic case in point is had you invested in Amazon and Netflix during the pandemic, you probably would have made a significant amount of money if you've managed to get in and out at the right time. That's because everyone was sitting at home watching the TV, and Amazon shopping went through the roof.
“There are two fundamentals I use with all my clients. Number one is that massive global diversification is key. So, not putting all our eggs in one basket. I never try to chase particular asset classes at certain times because again, that's market timing and I can't do that. I always tell my clients that if I could do market timing, I wouldn't be talking to them, I'd probably be on my own island in the Bahamas somewhere. The best you can do is simply keep your investments very, very highly diversified. Something that is every bit as significant, in my opinion, is to keep costs low too. So, most of my clients are in hugely diversified global index tracking funds, which are extremely cheap to run. Because when it comes to investing, apart from the level of service, there are only two things that clients are interested in over the long term. One is performance and the other one is charges. Only one of those is guaranteed. The only thing a client knows from the outset is how much they're paying. No one can tell them what their returns are going to be because nobody can tell what the markets will do.
“So, I personally am a keen advocate of keeping costs low, investment charges low, and trying my best to constantly manage the behaviour so they don't run down that wrong road or get off the rollercoaster when it isn’t safe. I'm not wanting to try to move things around every five minutes based on the current environment in one market or another. John Bogle who founded The Vanguard Group once said: “Instead of trying to find the needle in the haystack, just buy the haystack.” That’s because the good stuff is in there as well as the bad. Diversification of investment has historically always gotten investors out of trouble in the long-term.”
Listen to the full interview with Manning & Company's Mike LeGassick below.
Photo by Jeremy Bezanger on Unsplash
