ADVISER TOOLKIT INVESTING THROUGH VOLATILE TIMES Supporting our Investing through volatile times client sales aid For financial advisers only
HOW TO USE THIS MARKET VOLATILITY TOOLKIT Use these diagrams and graphs to support your discussions with clients about market volatility. You can give your client the Investing through volatile times sales aid, pictured to the right. Access the sales aid here: www.oldmutualinternational.com/volatile_times CONTENTS PRINCIPLE 1 HAVE A PLAN AND STICK TO IT 3 PRINCIPLE 2 THINK TWICE BEFORE PUTTING YOUR MONEY IN CASH 4 PRINCIPLE 3 DIVERSIFY AND ALWAYS CONSIDER YOUR INVESTMENTS AS A WHOLE 5 PRINCIPLE 4 START INVESTING EARLY IF YOU CAN 6 PRINCIPLE 5 INVEST FOR THE LONG TERM 7 PRINCIPLE 6 ALWAYS TAKE PROFESSIONAL FINANCIAL ADVICE 10 2
PRINCIPLE 1 HAVE A PLAN AND STICK TO IT FOLLOW A STEP-BY-STEP INVESTMENT PROCESS FACT FIND Understand your clients investment needs, attitudes and objectives and different investment requirements. PRODUCT SELECTION Your clients will have different investment timescales for different types of investment, so their attitude to risk may vary depending on how soon they ll need to access their savings. EXECUTE BUSINESS AND ONGOING REVIEW FACT FIND PRODUCT SELECTION RISK ASSESSMENT AND DISCUSSION A client s risk score is a starting point for a more in-depth discussion about their attitude to risk and their willingness and capacity to accept possible loss. SUITABILITY This suitability step is crucial in enabling you to make the right investment choice for different clients who might have similar attitudes and preferences. FUND SELECTION RISK ASSESSMENT AND DISCUSSION PORTFOLIO BUILDING While the individual mix of assets needs to be tailored, all good portfolios have one common thread they are diversified. FUND SELECTION Effective portfolio construction involves understanding your client s investment goals along with their attitude to risk, then choosing the appropriate investments to match. PORTFOLIO BUILDING SUITABILITY EXECUTE BUSINESS AND ONGOING REVIEW It s crucial to periodically review your client s portfolio and investments to ensure they still reflect their attitude to risk. Visit the Investment Planning module on our Future Fit site for more information on the step-by-step process - www.oldmutualinternational.com/futurefit 3
PRINCIPLE 2 THINK TWICE BEFORE PUTTING YOUR MONEY IN CASH THE ERODING POWER OF INFLATION At just 2.5% inflation, an investor would lose nearly half of their purchasing power over 25 years. So, 10,000 today would only have the purchasing power of 5,310 in 25 years time. Value 10,000 9,500 9,000 8,500 8,000 7,500 7,000 6,500 6,000 5,500 5,000 0 5 10 15 20 25 Years 5,310 8.00 7.00 6.00 5.00 Inflation Projected inflation Interest rates Projected interest rates LOW FUTURE INTEREST RATES Historically, interest rates have normally outstripped inflation. Investing in a standard interest bearing bank account would have provided some protection against the ravages of inflation. However, looking forward interest rates are expected to stay below inflation. Percentage 4.00 3.00 2.00 1.00 0.00-1.00 1998 2007 2015 2023 Source: Interest Rate, Bank of England Base Rate, Bank of England, and inflation (CPI), Office for National Statistics over period 01/01/1998 to 01/01/2023. Future inflation (CPI) projections are from Economic and Fiscal Outlook, OBR, October 2018 and future interest rate projections are from Statista - The Statistics Portal, December 2018. 4
PRINCIPLE 3 DIVERSIFY AND ALWAYS CONSIDER YOUR INVESTMENTS AS A WHOLE There are many different asset classes that an investor can choose, each having different risk characteristics. The chart below shows the annual returns of various asset classes over the last 10 years. There is no guarantee that the sector that performs well in one year will be top the next. In fact, it is often the opposite! For example, the performance of the is tracked with a blue line in the chart below, to show how its performance varies from year to year, illustrating the benefit, in general terms, of diversification. By spreading investment across different asset types, it is possible to avoid exposing a portfolio to undue risk. 2008-2009 2009-2010 2010-2011 2011-2012 2012-2013 2013-2014 2014-2015 2015-2016 2016-2017 2017-2018 Worst Performance (%) Best 72.75 62.25 59.94 41.51 34.25 30.76 25.11 24.48 14.55 12.08 4.75 0.49 25.72 24.35 21.45 17.85 15.99 15.60 15.06 14.63 10.93 8.94 7.53 0.51 7.31 2.57 1.17 0.60 0.11 0.09-0.69-5.86-7.03-7.49-9.70-17.57 14.32 12.75 11.09 8.81 7.61 7.59 6.89 6.07 4.71 3.41 0.55-2.28 35.02 32.30 28.68 26.76 24.30 17.09 14.66 12.03 8.77 6.75 1.84 0.21 12.50 8.39 4.73 4.37 4.24 4.11 1.71 0.55 0.54 0.06-0.27-1.86 12.87 8.49 8.24 7.92 6.86 4.55 2.47 2.34 0.06-1.57-5.28-11.43 37.15 34.97 31.97 29.68 26.56 24.84 23.22 21.76 19.09 8.65 7.85 0.22 24.09 19.03 16.63 16.46 15.72 15.07 14.23 13.75 11.49 4.50 0.13-0.72 8.59 2.08 1.13 0.39-0.19-2.42-3.87-6.13-7.11-10.06-11.45-13.46 Past performance is not a guide to the future. The value of units may fall as well as rise. The information provided is for illustrative purposes only and doesn t represent the past performance of any particular investment. Source: FE Analytics. Total return, percentage growth, over the period 31/10/2008 to 31/10/2018. All asset classes are represented by their equivalent Investment Association (IA) sector. The diversified portfolio is an equal split of all shown asset classes and has been provided to illustrate the benefit, in general terms, of a diversified portfolio of assets. It is not a Quilter Investors portfolio or fund. It is not possible to invest directly into an IA sector. 5
PRINCIPLE 4 START INVESTING EARLY IF YOU CAN Compound interest can have an incredible effect on an investment portfolio. The chart to the right shows two investors who both invest 10,000 every year into global equities. However, investor A began in 1993 and investor B started five years later. 800,000 700,000 600,000 Investor A Investor B Over 25 years, investor A has accumulated savings of 652,219 compared to savings of 453,754 for investor B over 202,465 more! If investor B wanted to accumulate the same pot they would need to invest 21,314 every year, more than double that of investor A. Value 500,000 400,000 300,000 200,000 100,000 0 1993 1998 2003 2008 2013 2018 Past performance is not a guide to the future. The value of units may fall as well as rise. The information provided is for illustrative purposes only and doesn t represent the past performance of any particular investment. Source: FE Analytics. Total return, percentage growth, based on an initial investment of 10,000 into UK equities over the period 31/10/1993 to 31/10/2018. All asset classes are represented by their equivalent Investment Association (IA) sector. It is not possible to invest directly into an IA sector. 6
PRINCIPLE 5 INVEST FOR THE LONG TERM Using UK equities as an example, the chart to the right shows how missing just a few of the best days can have a devastating impact on returns. Over the last 25 years, using the same example as on page 6, with 10,000 initial investment, an investor who stayed in the markets throughout the period could have a potential return of more than double that of an investor who missed the best 25 days. 50,000 40,000 30,000 20,000 44,572 35,756 29,932 25,666 22,457 19,802 10,000 0 Stayed invested Missed 5 best days Missed 10 best days Missed 15 best days Missed 20 best days Missed 25 best days Past performance is not a guide to the future. The value of units may fall as well as rise. The information provided is for illustrative purposes only and doesn t represent the past performance of any particular investment. Source: FE Analytics. Total return, percentage growth, based on an initial investment of 10,000 into UK equities over the period 31/10/1993 to 31/10/2018. All asset classes are represented by their equivalent Investment Association (IA) sector. It is not possible to invest directly into an IA sector. 7
PRINCIPLE 5 INVEST FOR THE LONG TERM IA GLOBAL SECTOR, PERFORMANCE OVER THE LAST 25 YEARS Significant market downturns can be rapid and difficult to endure, but history suggests markets will eventually recover. Loss during downturn -15% Gain during upturn 57% Dates of downturn Feb 94/ Jan 95 Duration (months) 12 Dates of upturn Jan 95/ Oct 97 Duration (months) 33 After almost 25 years, we have seen a number of significant market declines, as the chart opposite illustrates. However, the upturns that follow have on average lasted longer and been greater. This trend helps explain why shares (equities) have historically exhibited relatively strong long-term performance. -24% -13% -10% 16% 27% 72% Oct 97/ Nov 97 Jul 98/ Oct 98 Mar 00/ Apr 00 1 3 1 Nov 97/ Jul 98 Oct 98/ Mar 00 Apr 00/ Sep 00 8 18 5-37% 19% Sep 00/ Sep 01 13 Sep 01/ Dec 01 2-35% 94% Dec 01/ Mar 03 15 Mar 03/ Apr 06 37-13% 27% Apr 06/ Jun 06 2 Jun 06/ Oct 07 16-34% 10% Oct 07/ Oct 08 13 Oct 08/ Nov 08 1-13% 20% Nov 08/ Nov 08 1 Nov 08/ Jan 09 1-19% 62% Jan 09/ Mar 09 2 Mar 09/ Apr 10 13-13% 24% Apr 10/ Jul 10 3 Jul 10/ Jul 11 12-19% 21% Jul 11/ Oct 11 3 Oct 11/ Mar 12 5-10% 60% Mar 12/ May 12 2 May 12/ Apr 15 35-17% 29% Apr 15/ Feb 16 10 Feb 16/ Oct 18 33 Average 6 19 Past past performance is not a guide to the future. The value of units may fall as well as rise. The information provided is for illustrative purposes only and doesn t represent the past performance of any particular investment. Sources: FE Analytics: Total return, percentage growth of the IA Global sector over the period 01/02/94 to 31/10/2018. It is not possible to invest directly in an index. Downturns are defined by a period when the stock market value declined by 10% or more from its peak, while the upturn period indicates the number of months from the trough of the downturn to the subsequent peak. 8
PRINCIPLE 5 INVEST FOR THE LONG TERM Wise investors know that investing is a long-term commitment. Historically, investors who have been able and willing to ride out the periods of decline in the markets have seen their investments recover. Investing with a long-term outlook and with long-term goals is the best way to reduce the impact of stock market fluctuations and see out periods of volatility. The chart opposite shows that over the last 25 years short-term volatility is a characteristic of investing, but over the long term the trend is a rising one. Value 60,000 50,000 40,000 30,000 20,000 1993 Maastricht Treaty takes effect 1995 Barings Bank collapses 1998 Russian financial crisis 1997 Asian financial crisis 1999 The Euro is established 2000 Dot com bubble peak 2001 Twin Towers attack 2002 Stock market downturn 2004 Facebook launched 2005 London bombings 2007 Sub-prime mortgage crisis 2008 Lehman Brothers collapses 2010 European sovereign debt crisis 2011 US loses AAA credit rating 2011 Arab Spring uprisings 2015 Chinese stock market crash 2014 Scotland votes No to independence 2016 UK votes to leave EU 2016 Trump elected President 2017 Korean missile tests 2018 Dow Jones hits record high 10,000 Global equities Global bonds 0 1993 1998 2003 2008 2013 2018 INVESTING FOR THE LONG TERM PREDICTING WHEN THE STOCK MARKET WILL RISE AND FALL IS ALMOST IMPOSSIBLE an investor with 10,000 in October 1993 could have seen their investment grow by nearly 450% when investing in global equities. investing for the long term could see investors through periods of market volatility. SHORT-TERM, REACTIONARY INVESTING CAN BE DEVASTATING trying to time the market is a fool s game and can be disastrous for investors. Past performance is not a guide to the future. The value of units may fall as well as rise. The information provided is for illustrative purposes only and doesn t represent the past performance of any particular investment. Source: FE Analytics. Total return, percentage growth, over the period 01/02/1993 to 31/10/2018. All asset classes are represented by their equivalent Investment Association (IA) sector. It is not possible to invest directly into an IA sector. 9
PRINCIPLE 6 ALWAYS TAKE PROFESSIONAL FINANCIAL ADVICE The following cycle of investor sentiment shows how emotions can play a key part in an investor s decision making and how a rash decision could have a negative impact. POINT OF MAXIMUM FINANCIAL RISK EUPHORIA ANXIETY TEMPORARY SET BACK I M A LONG-TERM INVESTOR. THRILL DENIAL EXCITEMENT FEAR OPTIMISM HOW COULD I HAVE BEEN SO WRONG? DESPERATION CAPITULATION PANIC OPTIMISM RELIEF HOPE DEPRESSION DESPONDENCY POINT OF MAXIMUM FINANCIAL OPPORTUNITY 10
11 SHARE OUR PRINCIPLES OF INVESTING E-BOOK WITH YOUR CLIENTS For a quick and easy reference guide on investment basics, visit www.omi-investmentprinciples.com
The information provided is for illustrative purposes only and doesn t represent the past performance of any particular investment. Past performance is not a guide to the future. The value of your client s investments may fall as well as rise and they may not get back what they put in. www.oldmutualinternational.com Calls may be monitored and recorded for training purposes and to avoid misunderstandings. Old Mutual International Isle of Man Limited is registered in the Isle of Man under number 24916C. Registered and Head Office: King Edward Bay House, King Edward Road, Onchan, Isle of Man, IM99 1NU, British Isles. Phone: +44 (0)1624 655 555 Fax: +44 (0)1624 611 715. Licensed by the Isle of Man Financial Services Authority. Old Mutual International is registered in the Isle of Man as a business name of Old Mutual International Isle of Man Limited. Old Mutual International Ireland dac is regulated by the Central Bank of Ireland. Registered No 309649. Administration Centre for correspondence: King Edward Bay House, King Edward Road, Onchan, Isle of Man, IM99 1NU Tel: +353(0)1 479 3900 Fax: +353(0)1 475 1020. Registered and Head Office address: Hambleden House, 19-26 Lower Pembroke Street, Dublin 2, DO2 WV96 Ireland. VAT number for Old Mutual International Ireland dac is 6329649S. Old Mutual International is registered in Ireland as a business name of Old Mutual International Ireland dac. SK19136/INT19-0027/January 2019