What is the change?
Since January 2018, we have been required to notify our discretionary clients within 24 hours if their portfolio falls by more than 10%, in any one day, as a result of market volatility. It was a well-intended piece of legislation; designed to improve transparency for investors and to ensure that clients remained engaged with the performance of their investment portfolio over time. However, there have been some unintended consequences and so the rule has been revoked by the UK Government with effect from 18 January 2023.
The good news
Here at Equilibrium, we think this is great news, primarily because it shows that the regulator and the Government are of the same mind as we are and they are reiterating what we say to clients all the time – short-term volatility is a natural part of investing and should be expected. Purposefully highlighting such drops, without then also highlighting any rebound, creates a negative and concerning approach to investing, where longer-term goals and objectives become lost.
To illustrate this volatility, chart one below shows the FTSE All Share return and the max. drawdown (the maximum observed loss from a peak to a trough) for each year from 1986 to 2022. We can see from the chart that there have been 27 out of the 37 years where the max. drawdown was 10% or worse. Despite this, the FTSE All Share return was only negative for 10 out of the 37 years.
Chart one – FTSE All Share return and max. drawdown (1986-2022)
Source: Thomson Reuters 2022
If we then focus on the long-term investment growth of the FTSE All Share and ride out these short-term volatilities in the market, the total return over the 37-year period was a whopping 2,209% as shown in chart two.
Chart two – FTSE All Share TR in GB (1986 – 2022)
Source: FE Analytics to 10 January 2023
This just goes to show that these measures put in place by the FCA were not fit for purpose and had the unintended consequence of causing panic, potentially leading to behaviours we would not expect from long-term investors.
We also believe that investors should consider their investment portfolio as a whole, ensuring that they are well diversified by using a variety of tax wrappers. Each of these accounts may have a different investment time horizon, resulting in some accounts holding more investments with a higher risk and growth potential than others.
In a market downturn like we have seen during the Covid-19 pandemic, we saw huge fluctuations in global markets, with these riskier investments falling more sharply and resulting in a higher loss within the accounts which are held for the long term.
However, if we consider the overall return of the whole portfolio, then we will likely find that this shows a much better picture. One of the main flaws of the 10% drop rule is that it requires reporting on an individual account level instead of taking the whole portfolio investment performance into account which may lead investors to have a skewed view of the overall portfolio returns.
Whilst we do our best to reassure all of our clients as concerns arise, if there is anything that is worrying you, please do reach out to your usual Equilibrium contact or call us on 0161 486 2250. For all new enquiries please call 0161 383 3335.
Past performance is for illustrative purposes only and cannot be guaranteed to apply in the future.
This blog is intended as an information piece and does not construe advice.