Alpesh Patel is an award-winning trader, author and financial commentator. He is a regular BBC, Bloomberg and Sky Business News contributor and has published a number of best-selling books about business, politics and finance. Alpesh recently met with Investec Head of Fund Research Andrew Summers in his Mayfair office to talk about investing for major life events and how to avoid common first-time investor mistakes.
Andrew: Alpesh, you’ve always been a busy man in addition to your responsibilities in the asset management industry, you’re also a broadcaster, and an author. I hear you’re about to become even busier.
Alpesh: I am, there’s a phone over my shoulder which is probably going to buzz any moment because my wife says she’s about to go into labour, so I’m going to become a dad.
The funny thing is, I think I started thinking about financial arrangements the morning my wife came upstairs and said ‘we’re having a baby,’ and that doesn’t half focus the mind when it comes to investing. And I can tell you it’s a funny thing, you can live in this world of investments and this rarefied world of investments, and you have to be your own doctor as it were and work out what you should do for the next 18 years, or god forbid 30 years of costs and fees and all the rest of it.
It’s very difficult when it’s for yourself, you’re advising, but it’s incredibly important and it really has focused my mind. Up till now I’ve always invested with a view to, well, basically I want to work less hard as I get older, that’s why I think a lot of people invest. And obviously there’s been objectives, whether it’s, you know, investments in property or whatever else you had a goal you were investing for.
Now there’s a brand-new goal, and a brand-new seriousness to it, and an urgency to it, because you’re only given about nine months’ notice, and, yeah, it’s an exciting time. But I’m actually optimistic from an investment perspective for the world and how it’s going to look in 18 years. I’m actually very optimistic that it’s not going to be … you know, whatever might happen to the environment and all the rest of it around the world, I think from an investment perspective I’m very optimistic.
Andrew: In the past I know you’ve talked about some of the benefits that people might have for short-term trading, and you’ve mentioned that. If somebody is doing short-term trading because they enjoy it-
Andrew: -then you can’t put a value on that, that’s a pastime, it’s absolutely valid. But as an investment strategy, surely that’s not something that you would recommend the vast majority of people doing, but they should take a more longer-term approach and possibly with some professional advice?
Alpesh: You know, as an asset management firm within our firm whilst we might do the trading we have the investing part as well, and it’s the same with me as an individual. Whilst I might do the trading I have the investment part. The investment part’s a lot easier of course because you’re looking at a longer timeframe and a longer time horizon, and therefore with that, you know, you diversify away the risk by making sure you don’t have all your eggs in one basket as the cliché goes, you diversify your risk by ensuring you have a longer time horizon, and that’s the investment part.
That makes it sound simple, the real difficulty is okay, well what is it you’re going to put your money in to ensure that over that long period of time it is going to keep rising, and even when there’s falls you’re not worried. It has to be something of sufficient quality, or a basket of things of sufficient quality that even if there are dips, and there are always dips in the market no matter how good you are, no matter how amazing you are, that you’re not worried because you go well, that’s just part of the market noise, it doesn’t worry me, it doesn’t panic me, there’ll be ups and downs, and it also has to be of sufficient quality that when together, as a basket of eggs as I say, they don’t all move lockstep either, and that’s when you want an extra pair of eyes looking over it, you want, you know, the professional who’s paid to do it.
So, yes, when it comes to the investment part, incredibly important. I say this as a father of a new-born, but equally, you know, if you’re just about to get married, or you’ve got other life events, the sad thing about life events is those are the ones which usually are associated with the greatest expenditure – about to get married, a huge expenditure; about to buy a house, a huge expenditure; about to have a child, a huge expenditure, and the last thing you think about is investing, but it doesn’t half make your life easier when you think my god, thank god I started back then and not today.
Once you break that barrier life’s going to be a lot easier because you’re saving and investing for the future.
Andrew: So, one of the follow-ons from what you’re saying to me is that individuals often oversimplify investments, and they often think it’s either a choice between cash and stocks, and they should either be in the market, they should either be putting money in the market at a given time, or they should be taking money out of the market at a given time depending on where the relative stock market levels are.
I think there’s an alternative, and we would argue a better approach which is actually to acknowledge the benefits of diversification, and to say it isn’t just a case between equities and stocks, there are other important investments as well that you should have as part of a diversified portfolio, government bonds, corporate bonds, property, alternatives, and use an active manager to be able to move your portfolio around depending on where you see the relative prospects, but to always essentially be invested into a diversified range of assets and allow experts to at margins, and depending on your risk tolerances, to move the portfolio around on your behalf. Do you see that as a potentially attractive way that you would perhaps invest on behalf of your child?
Alpesh: Yeah. Let me put it in two ways. There is a group of people and I deal with them, and I work with them, who are at the trading end of being active in the markets, they do it because they enjoy it, and that’s not [unintelligible - 00:05:21], there’s a heck of a lot of … a number of people who say I love trading, I enjoy trading, I want to follow the markets actively, regularly, I want to look at it on my phone and that’s fine. Part of me is in that group, that’s in that category, 12 years where we set up a hedge fund, but we’ve also got longer term investments. We hedge even ourselves, our own investing, our own business by having the longer-term investments which is the bit you’re talking about, and when it comes to my child that’s the bit I’m going to be focused on which will be for the long-term future, for 18 to 20 years.
What a lot of people don’t realise is well, okay, diversification, why do I want that, what does it mean, what does this notion of not putting all my eggs in one basket actually mean. What it actually means is it’s a hedge against getting it wrong by trying to put a bet on just one thing. What we’re trying to do is things which don’t all move in lock-step at the same time, and the reason for that is that there’s a calamity which we cannot foresee, which there always is going to be, because after all, all the clever people here in Mayfair, nobody managed to work out the market crash, and when these calamities happen, which even hit us, the experts, we think to ourselves thank god we had a basket of non-correlated, or at least correlated as possible.
Now when you start saying correlation and diversification to the member of the public they rightly will say yeah, I don’t want to really look at those data points so I think I need somebody to do it for me. As long as they understand there’s a reason why professionals do what they’re doing, they are trying to find that diversification, they know it changes over time, the correlations, how things move in lockstep changes over time.
Overall what you’re trying to do is get them a return, the maximum possible return allowing for the amount of risk, or the volatility, or the changes in the total value of their portfolio, the likely changes. You can’t predict something might be down 10 percent next year, or it will be in two years, but we know roughly that’s probably the maximum it will probably drop given what’s happened historically, and now that sounds like a lot of complicated stuff.
We’ve talked about correlation, we’ve talked about risk reward, we’ve talked about diversification, now you can see why, of course, you say to people look, don’t let all those things make you think oh, inertia, I’m not going to do anything, forget it, it’s too complicated, it’s like health insurance, it’s like all those things, pensions, it’s like life insurance. All those things I know I should do one day, one rainy day, but I’m not going to because he just said a load of complicated stuff.
Actually, that’s the worst thing you can do, do not be put off by the complexity, the complexity isn’t your problem, it’s the problem for the expert. That’s why you pull the trigger, you find the professional to handle the headache, that’s what they’re paid to do in our field, we clearly like headaches, we love this stuff, we live and breathe it, that’s really the message from all that complexity. It’s not don’t try and understand it, no, understand it, read it in your own time, if you wish get one of my books and read it, but you don’t have to, but the most important thing is start.
Andrew: What would you say to people that really should be investing for their children’s future today, but they’re very aware that we’re in the middle of our Brexit negotiations and they’re very uncertain? What’s your advice?
Alpesh: You know with the markets uncertainty happens regardless of whether it’s Brexit or anything else, there’s always been uncertainties, that should never stop somebody investing for the long-term because there’s going to be ups and downs.
One thing that I’ve seen regardless of Brexit is the number of overseas investors. I mean in Singapore, in Hong Kong, in India looking to invest in Britain, these are overseas investors believing in Britain, so regardless of whether it’s hard, soft, whatever type of Brexit, the way I look at it is I’ve got to continue investing, we’ve all got to continue investing because we want to get a return, and I’m not going to let political uncertainties get in the way of that in the same way I won’t let the next crash, which is bound to happen sooner or later because they always do, get in the way of it.
And I don’t think people should be too fixated by day-to-day political news and uncertainties, because otherwise what they’ll end up doing is that age-old problem of inertia and that will really cost them money, because money in the bank account is actually money going down and depleting, whereas a longer-term investment is what is going to generate the returns. I think Brexit in a way is a red herring for them if it’s stopping them from investing at all.
Andrew: Well, Alpesh, this has been a really interesting conversation. Thank you very much.
Alpesh: Thank you.