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Investing in change

16 February 2017

Paul Nixon, CEO - LGT Vestra US

Written for The American Magazine

‘Change’ refers to a difference in a state of affairs at different points in time. Although it is a familiar concept, an analysis of change is more difficult than it suggests and has challenged philosophers for thousands of years.

Heraclitus is widely recognised as one of the first philosophers known to have brought the analysis of change to the fore, stating: "One cannot step into the same river twice..." observing that despite the river appearing the same, the body of water has materially changed. Furthermore, the person entering the water may look the same, however, they too will have changed. This is equally true of financial markets, despite appearances, they are never the same twice.

It is safe to say the modern world is changing more than ever before, with growing geopolitical risk and increased global nationalist and populist sentiment, change and the speed of change appear to have been considerably underestimated. Yet changes continue to provide surprises. How much would someone have received if they had placed a £1 bet on Leicester City winning the Premiership, the UK voting to leave the EU and Donald Trump winning the US election when they were at their longest odds? A £4,530,906 question.

It is therefore easy to understand why 2016 is being referred to as “the year of change”. 2017 however, has plenty of potential to continue this theme, with Donald Trump now #POTUS, the UK triggering article 50 and the general elections in the Netherlands, France and Germany. Those who lived through the eras of momentous change, such as the Industrial Revolution and the Great Depression, would argue that the world has always been dealing with significant change. It could however be said that it is the pace at which change is now taking place that is creating feelings of apprehension and uncertainty.

Nowhere is the pace of change more accentuated than in technology. How we communicate with each other has arguably been the fastest change in recent times, as advances in computers and mobile technologies have revolutionised all mediums of communication. In 1965, the first commercially successful minicomputer had an inflation-adjusted price of $135,470. However, even for this price it was only able to undertake basic computations, such as addition and multiplication. Its capacity was around 4,000 12-bit words. Today’s mid-range smartphone has a capacity 3 million times the size and costs less than $600.

Change is one of life’s few constants, excluding death and taxes, and whilst one must acknowledge, and indeed embrace change, one must also be aware of the dangers of trying to predict too specifically the outcome of any one event. After all, if it was that easy everyone would have made at least £4,530,906 last year.

Navigating change, financial or otherwise, becomes easier after clearly assessing goals, understanding the full implications of the change that is happening, including its precedents and patterns, and ensuring decisions are made on the basis of these and the resources available. This is a fundamental part of the wealth management process, preparing clients for change and helping them deal with and thrive throughout change.

Macro trends are very difficult to predict with any real precision, couple this with a rise in political risk and the arguments for a truly diversified portfolio become stronger. Making major asset allocation decisions or positioning a portfolio based solely on an anticipated outcome of a particular event is an extremely risky investment strategy. As witnessed during Brexit, many investors would have experienced sharp corrections after incorrectly positioning their portfolios for the widely anticipated “remain” vote. It is paramount to avoid being driven by change and positioning portfolios in favour of a particular outcome. Rather a strategy should be established to maximise the potential for success, utilising all available resources, including tax efficient, diversified strategies and alternative investments, to meet long-term objectives, with sufficient flexibility to take advantage of short-term tactical opportunities.

To paraphrase Donald Rumsfeld, once we have taken into account the known unknowns, we begin to worry about what the unknown unknowns are. In the end, it is reasoned judgement backed by careful thought that drives our decisions. This is more than ever pertinent today.

Change is constant and as goals are set, changes are happening. It is paramount that whilst the long-term natures of clients’ goals are acknowledged, how these goals can be achieved in the current environment is constantly reviewed. As Heraclitus said: “Those who love wisdom must investigate many things”.