The most common error made by clients and prospective clients of Barclays Wealth is to try to time the market and so hold off on investing, according to Robert Smith, head of behavioural finance at Barclays Wealth and Investment.
Smith said clients always felt “the present is the wrong time to invest, so they wait, and wait, and miss out on gains.
"They always feel that now is not the best time to invest and that they can identify when a better time will be. And strangely, the time that many people end up thinking is the best time to invest in the market is a period just before a crash when markets have been generally benign,” he added.
Duncan Lamont, head of risk and analytics at Schroders, said it was painfully tough to identify market tops.
He said: "Our research shows that shifting fully out of stocks on the basis of intimidating valuations has been a losing strategy for some in the past.
"You could temper your exposure perhaps, but drastic actions can have drastic consequences for your future wealth.”
He said at the end of March, the S&P 500 index of US large companies was valued at 34 times its earnings over the past 12 months.
This was more expensive than at the peak of the dotcom bubble at the end of 1999, when the figure was 31 times.
He added: "You could justifiably argue that the last 12 months has been distorted by the pandemic, so this isn’t a fair comparison. But it’s a similar story if we compare share prices with earnings smoothed over a longer horizon.
"We can do this with the cyclically-adjusted price earnings multiple, also known as CAPE, or the Shiller PE, after the academic, Robert Shiller, who invented it. CAPE compares prices with average earnings over the previous ten years, in inflation-adjusted terms.
"At the end of March the US stock market was trading on a CAPE of 36. The 140 year historical average is 17. The only time in history it has been higher was at the apex of the dotcom boom.”
Lamont said: “Let’s assume you’re an investor in the US stock market. And that you get the heebie-jeebies whenever the market valuation is more than 50 per cent expensive than its experience to date [...] and you buy back into the market when valuations are no longer more than 50 per cent expensive.
"If you made these decisions based on the CAPE multiple, you’d have been out of the stock market since 2013, bar a few scattered months. You’d also have sat out, not just the later stages of the dotcom bubble, but also the earlier years. And most of the years in the run-up the financial crisis.”
Paul Stocks, independent financial planner at Continuum, said many clients think they can know when is a good time to buy.
"It is something I try to tackle early on in the advice process with a bit of behavioural coaching. I try to explain to them that they may experience the short term volatility of an asset class, and that may hurt for a year or two, but over the twenty-five year time horizon they get the benefit of that asset class.
"Those who try to time it, tend to end up buying high and selling low.”
Smith said Barclays Wealth was looking to academia as well as to its own research to help them understand client behaviour in future, but one thing which has become apparent is that while younger clients have a preference for technology, older clients prefer to operate in a more traditional way.
He said the company did not have a “robo-advice” product, but used technology sufficiently frequently that it is a “hybrid model.”
david.thorpe@ft.com
