If you live in the UK, you may look forward to the colourful and vibrant firework displays that light up the night sky every 5 November. The occasion, known as Bonfire Night or Guy Fawkes Night, is now a fun and festive affair, yet its origins are far more sinister, as it celebrates the failure of the infamous “Gunpowder Plot” of 1605.
A group of conspirators aimed to blow up the palace at Westminster during the State Opening of Parliament with King James I in attendance due to his staunch Protestant beliefs and perceived intolerance towards Roman Catholics.
One of the plotters, Guy Fawkes, has become so synonymous with the event that his name will likely remain etched into British history forever.
As Bonfire Night approaches once again, there are several invaluable investing lessons you can draw from the historical event and Fawkes’s actions.
1. Don’t follow the crowd
When you initially think of the Gunpowder Plot, you likely associate it the most with Guy Fawkes. Though, contrary to popular belief, he wasn’t the chief architect of the plan, as that title belongs to Robert Catesby, who orchestrated the entire plot and assembled the group of conspirators.
Fawkes, with his military experience and knowledge of explosives, was simply tasked with lighting the fuse. Unfortunately for him, this decision led to his eventual gory end, as he was discovered, charged with treason, and ultimately hanged, drawn, and quartered.
This lesson applies to your investment strategy, too. Blindly following the crowd – which is often referred to as “herd mentality” – can lead to unfavourable outcomes.
This occurs when you make decisions based on what everyone else is doing, rather than evaluating whether it suits your individual goals and appetite for risk. You may also experience a “fear of missing out” (FOMO), which can drive you to make impulsive decisions.
While it can be tempting to follow trends or listen to what your friends or “finfluencers” on social media recommend, doing so without prior due diligence could lead to poor results.
In fact, according to research from Capital One, 74% of people who followed financial advice from social media experienced losses or unfavourable outcomes.
It’s vital to remember that just because an asset is popular, doesn’t necessarily mean it’s a good choice for you.
Instead of investing based on what everyone else is doing, it’s worth taking time to conduct thorough research and assess how an investment aligns with your own financial goals.
Just like Fawkes’s blind allegiance to the plot led to his eventual downfall, following the crowd when you invest could lead to considerable losses.
2. The “explosive” approach isn’t always best
The Gunpowder Plot was a dramatic and explosive plan that, had it succeeded, would have significantly altered British history.
The conspirators believed that their cause could only be achieved through such a sensational and high-risk act of destruction. Yet, this approach contributed to its failure, and a more measured and strategic plan might have allowed them to achieve their goals.
This lesson also holds true for your investments. You might be tempted to invest in several attention-grabbing assets that promise considerable returns, such as the “Magnificent Seven”, a group of major tech companies including Apple, Amazon, and Google, that have dominated headlines recently.
As appealing as these companies might be due to their competitive performance, relying solely on them might not be the wisest of strategies.
Data actually shows that some of today’s “star performers” might not hold these top positions for long. Indeed, Schroders reveals that in 12 of the past 18 years, no top-performing US company has remained in the top 10 the following year.
Even in the UK, for 11 out of those 18 years, the average top-10 performer fell to the bottom half of the performance distribution in the next year.
This highlights the risks of relying on a single high-profile investment. Markets tend to be unpredictable, and today’s big company could fall in value tomorrow, meaning that investing in these sensational assets could leave your portfolio vulnerable to decline if they underperform.
Rather than opting for the investment equivalent of a Gunpowder Plot that claims to deliver sensational returns, a steadier and more strategic approach based on your long-term plans might better suit you.
3. Don’t put all your eggs in one basket
When the Gunpowder Plot failed, the conspirators were left with no backup plan. Many of them fled London in a desperate attempt to escape the authorities, with Catesby himself fleeing to Staffordshire where he was ultimately killed while resisting government troops.
This lack of a secondary strategy, or even a hidden cache of gunpowder elsewhere in London, meant that the conspirators had no opportunity to salvage their scheme.
Similarly, in investing, it’s often wise to avoid placing all of your eggs in one basket.
Diversification is key to managing risk. By spreading your investments across various sectors, asset classes, and geographical areas, you can reduce the effects that a downturn in one area can have on your overall portfolio.
Remember that markets are inherently volatile, and so a diversified portfolio could help you mitigate the risk of considerable loss.
A good example of this is the airline industry, which was severely affected by the Covid-19 pandemic. Yahoo Finance shows that, between February and April 2020:
- easyJet fell from £12.70 to £4
- International Consolidated Airlines Group (the parent company of British Airways) fell from £6.39 to £2.23
- Jet2 fell from £18.97 to £4.96.
Even today, these companies are yet to fully recover to their pre-Covid levels. If you had invested solely in the airline industry in 2020, you’d likely have suffered considerable losses that would still affect your portfolio to this day.
Conversely, if you’d also invested in tech companies, which have performed incredibly well in recent years, the gains from these investments might have offset the losses from the airline sector.
It’s essential to remember that diversification doesn’t completely eliminate risk, but it can reduce the chance that a single event will have a considerable effect on the overall value of your portfolio.
Just as the Gunpowder Plot conspirators could have benefited from spreading their risk, you too could potentially protect yourself by ensuring your investments aren’t overly concentrated in one area.
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Please note
This blog is for general information only and does not constitute advice. The information is aimed at retail clients only.
The value of your investments (and any income from them) can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance.
Investments should be considered over the longer term and should fit in with your overall attitude to risk and financial circumstances.