The Dr Seuss of Investing – SAD, PAD, MAD and FAD.

It’s that time of year again where the leaves start falling and temperature drops.  These misty mornings awash with autumnal colours look fantastic.  Some people don’t see the colours, blinded by the longer nights and deterred by the falling temperatures.  Seasonally Adjusted Depression (SAD) is a reality for many.  But it seems that this is not the only adjusted depression affecting people.

I have discussed the current state of the world with many clients, and there are definitely groups that are suffering from a Politically Adjusted Depression (PAD).  I often hear comments like “Brexit is a complete disaster” followed by “and then there’s Trump…”.  If we add in the global nuclear ‘sabre rattling’ a Militarily Adjusted Depression can ensue (MAD). 

If that is the context for your financial review meeting then it is easy to slip even further into a Financially Adjusted Depression (FAD).  It could be a title for a new Dr Seuss book, feeling SAD, PAD, MAD and FAD….

Sufferers of FAD see recessions and market crashes looming, and often struggle to take into consideration the growth in portfolios achieved over the last few years.  And if you are burdened with many of the adjusted depressions the outlook can seem very bleak indeed. 

But if we look back over the last few years from an investment point of view, even the most pessimistic of people would say they wish they had not been so worried.  It’s been good.  In the last 5 years the annualised return in the Mixed Asset 40-85% Equities Sector (Balanced Managed in old money) has been 8.6%, which is way ahead of interest rates and inflation.  We’ve had all sorts of world shaking events along the way, but the global economic growth has been fairly consistent, which has been reflected in investment values.

Recent research by Prakash Loungani of the International Monetary Fund found that over the last three decades, of the 150 recessions recorded in 63 countries, only two had been forecast by economists the year before.  For those feeling an adjusted depression it just goes to show how bad economists are!

But there is a positive angle worth noting.  A recession is generally defined as two successive quarters of contraction in the Gross Domestic Production of a nation.  So this means that there were 7,560 quarters considered in Loungani’s research (63 countries x4 quarters each year x30 years) and only 150 instances of recessions.  Perhaps they are hard to predict because they are quite rare.

With a well-diversified investment portfolio the balance of probability is in favour of a positive return over the medium to long term (5+ years).  So in the words of Dr Seuss:  “Just tell yourself, Duckie, you’re really quite lucky!”. 

Sources:  FE Analytics, 28 September 2017 / The Guardian:  “Why Economic Forecasting has always been a flawed Science”, 02 September 2017 / Did I Ever Tell You How Lucky You Are? Dr Seuss

Your capital is at risk.  The value of your investments can fall as well as rise.