3 invaluable investing lessons from the signing of the Magna Carta

On 15 June 1215, English history conceivably changed forever on a windswept bog called Runnymede.

Here, King John, who was facing a rebellion by his barons, reluctantly signed the Magna Carta, a document that established legal rights for the English people and limited the power of the monarchy.

Considering that the king annulled the charter only three months after its signing and that subsequent monarchs reissued it six times, the Magna Carta’s power was questionable.

However, its signing was arguably a turning point for absolute monarchical power, and it laid the groundwork for growth and stability in the country.

Interestingly, the signing of the 800-year-old document also holds some surprising insights for modern investors. Continue reading to discover three of these investing lessons.

1. Create a “constitution” for your portfolio

A “constitution” is a set of principles and fundamental rules by which a country is organised and governed, usually contained within a document.

The Magna Carta isn’t exactly the British constitution – it is “partly written and wholly uncodified”, after all – but it did enshrine legal rights and was essentially the inspiration for future developments.

Even other countries used the Magna Carta to later form their own constitution. The basic rights embodied in the US Constitution, for example, can trace their ancestry back to the Magna Carta.

Much like a nation thrives on a clear set of principles defined in a constitution, your portfolio can also benefit from a well-defined investment plan. This “constitution” should ideally outline your investment goals, tolerance for risk, and investment time frame.

When it comes to your goals, it’s worth considering what you’re investing for in the first place, be it retirement, a child’s education, or a dream holiday.

Keeping these medium- and long-term goals in mind can help you determine which investments would be most suitable for you, how long you may want to stay invested, and how much risk you’re comfortable taking on.

For example, if you want your investments to provide for university fees for a newborn child, you’ll have a minimum investment term of around 18 years. Since your child’s education is the goal, this may influence your attitude to risk.

Conversely, if you’re saving for retirement and it is still decades away, you may be willing to initially take on more investment risk.

Having this “constitution” regarding your investments can provide much-needed peace of mind that you’ve taken on an appropriate level of risk, and the confidence knowing that you’re always on track towards your goals.

2. Establish your own checks and balances

The English barons wished to rein in the tyranny and absolute rule of King John, hoping that the checks and balances contained within the Magna Carta would help them achieve this. Some of the measures included in the document are:

  • Nobody is above the law.
  • Punishment could only be in accordance with the law of the land through due process and not the whims of the king.
  • The law is applied equally and fairly.
  • A qualified and independent judiciary is required without improper influence or corruption.

It is as Winston Churchill once wrote: “In place of the King’s arbitrary despotism they proposed, not the withering anarchy of feudal separatism, but a system of checks and balances which would accord the monarchy its necessary strength, but would prevent its perversion by a tyrant or a fool.”

Similarly, your portfolio needs its own safeguards to manage risk. This often comes down to diversification, a concept similar to the ideas of checks and balances.

You will surely have heard the phrase “don’t put all of your eggs in one basket”, as if you drop that basket, you’re risking breaking all your eggs.

Investments can be much the same, as if you invest all your wealth in one sector, and it experiences a period of volatility, your entire portfolio could fall in value considerably.

Meanwhile, diversification means spreading your wealth across various different sectors and geographical areas, helping limit the effects of a sudden market downturn on your portfolio.

It’s also worth ensuring that you don’t invest solely in one asset class – that is, groups of investments that behave similarly to one another, such as equities, fixed income, or property.

The asset quilt below, which displays key equity and bond index returns over 10 years, highlights the power of diversifying across asset classes.

Source: Vanguard

As you can see, each of the different asset categories has finished lower than the other at varying times. With such a wide spread of performance, dividing your investments across the different asset classes could give you more rounded portfolio growth.

While diversification doesn’t guarantee profit or the elimination of risk, a wide, multi-asset spread of investments can be far more beneficial than a narrowly focused portfolio. As such, it’s often practical to ensure that your portfolio is balanced, and a set of checks and balances could help you adhere to this practice.

As an example, this could involve ensuring that your portfolio isn’t too overweight in a certain area. Barclays reveals that the UK stock market makes up around 4% of the global market, yet British investors typically allocate 25% of their portfolio to domestic holdings.

If you find that you’re overweight in one area, then a check and balance that is practical to have would be to review your portfolio and figure out ways to further diversify your assets.

3. Avoid impulsive decisions

It’s fair to say that King John made some impulsive decisions during his reign that ultimately hurt England.

For instance, he married the heiress of Audemar who was already betrothed, causing a rebellion. When he refused to appear before King Phillip II of France to answer for this, a war broke out, and he lost many English holdings in France, spelling the end for the Angevin Empire.

He also unfairly raised taxes and exploited feudal rights to fund his wars, causing discontent within the barons and eventually leading to civil war.

After the barons rebelled and marched towards London, King John was forced to sign the Magna Carta.

King John’s impulsive decisions were detrimental to England, and the same sort of choices could affect your investments. For instance, if you make a decision based on a knee-jerk reaction to market volatility, you could crystalise your losses and hamper your progress towards your long-term goals.

There are some common emotional biases to be aware of, too, such as:

  • Loss aversion – Feeling the pain of loss twice as strongly as the pleasure of gains, meaning you avoid risks and miss out on opportunities, hampering the growth of your portfolio.
  • Herd mentality – Following the crowd without conducting proper research, as seen during the dot-com bubble. Many investors jumped on the bandwagon and invested in internet companies without doing research, and many faced substantial losses when the bubble burst.
  • Confirmation bias – Having the tendency to seek out information that confirms your existing beliefs while ignoring contradictory evidence.

To prevent any impulsive or emotional decisions from affecting the performance of your investments, it’s worth focusing solely on your long-term goals.

Remember that markets fluctuate, and short-term dips are part of investing. So, if you react to volatility, you could miss out on long-term gains.

Much like the Magna Carta was a long-term solution to stability rather than a quick fix, it’s worth applying the same perspective to your portfolio.

Get in touch with us

Above all, working with a planner can give you much-needed confidence in your plan. They can act as a sounding board when you’re thinking of making changes to your investment strategy, and help you avoid making impulsive decisions that could derail your progress towards your financial goals.

Much like the barons who forced King John to sign the Magna Carta, a good financial planner can act as a check on your emotions and ensure you remain on track with your investment strategy. Though, unlike the barons, we won’t force you to do anything you don’t want to!

To find out how we can help, please call 01992 500261 or fill in our online contact form to organise a meeting and we’ll be in touch.

Please note

This article 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.

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