A selection of our top tips to ensure a successful long-term investment experience…
Last Updated: 26th March
At times like this, it is sometimes worth reminding ourselves that it is the very uncertainty of shorter-term market outcomes that delivers investors with returns above those of placing cash in bank deposits. Accepting the market movements of investments allows us to grow our purchasing power over time. In the case of equities, this uncertainty can be high as the market adjusts its view of long-term earnings and the discount rate it uses to establish market prices. If there was no uncertainty, then there would be no equity premium.
To put it simply, markets are struggling to price-in the fast-changing pandemic outlook, which leads to investment values jumping up and down sporadically.
The media is not helping
Recently we have seen sensationalist headlines, such as the BBC’s: ‘Coronavirus fears wipe £200 billion of UK firm’s value’
We much prefer the never-published headline of: ‘Over the past 10 years global equity markets have turned £100 into £266, so giving a bit back is perhaps to be expected’. This would certainly provide some comfort to those who are already invested. To those who aren’t invested or have money to invest, stocks are cheaper than they were at the start of the year. Good news does not sell as well as bad news!
You may be asking yourself whether this health-driven market event is different to those that have gone before. It is, but only because every market fall is driven by a different combination of events that impact on future corporate earnings. What should remain the same is your response to it: avoid panic, avoid unnecessary emotionally driven investment activity, believe in your portfolio and the power of markets and capitalism to recover in time.
Here are our tips to help keep things in perspective:
- Unplug from the media. If 2010-2019 was the decade of ‘fake news’, the start of 2020 is proving to be the decade of mass disinformation. Distill the information your brain is processing by focusing on advice from the UK Government (LINK), World Health Organisation (LINK) and NHS (LINK).
- Embrace the uncertainty of markets – that is what delivers you with strong, long-term returns. Remember that you most likely own bonds in your portfolio too. Your portfolio won’t be down as much as headlines suggest.
- Don’t measure your portfolio’s performance from the top of the market, but over a longer and more sensible timeframe. Over the past five years, investors have received growth in excess of cash returns and importantly, inflation.
- Don’t look at your portfolio too often. Get on with more important things. Once a year is more than enough. If you are looking every day, then have a word with yourself. Stop listening to the news too, if it worries you.
- Don’t extrapolate recent returns. Just because the market has fallen doesn’t mean it will keep falling… or that it will come roaring back. Trying to guess the stock market’s short-term direction is a fool’s errand and a waste of mental energy.
- Control what you can. The financial markets may be chaotic, but your financial life doesn’t have to be. There’s so much that you can control, like how much you spend and save and maybe the most important thing for you to control at this juncture – is your own emotional response to the market’s turmoil. For your investments, there is so much that we already control for you, like reducing your investment costs, your portfolio’s structure to reduce tax, how broadly your portfolio diversifies and the mix of growth and defensive assets you hold.
- Accept that you cannot time when to be in and out of markets – it is simply not possible. Resign yourself to this fact. Hindsight prophecies – ‘I knew the market was going to crash’ – are not allowed.
- If markets have fallen, remember that you still own everything you did before (the same number of shares in the same companies, and the same bonds holdings).
- Most crucially, a fall does not turn into a loss unless you sell your investments at the wrong time. If you don’t need the money, why would you sell? Falls in the markets and recoveries to previous highs are likely to sit well inside your long-term investment horizon i.e. when you need your money. Our Financial Planning based conversations will help ensure that we understand when you need to access your funds.
- The balance between your growth (equity) assets and defensive (high quality bond) assets was established by your Financial Planner to make sure that you can withstand temporary falls in the value of your portfolio, both emotionally and financially.
- Be confident that your (boring) defensive assets will come into their own, protecting your portfolio from some of equity market falls. You can see this in action in the one-year chart below. Be confident that you have many investment eggs held in different baskets.
- If you are taking an income from your portfolio, remember that if equities have fallen in value, we can consider taking your income from your bonds, not selling equities when they are down.
- Your Financial Planner is here – at any time – to talk to you. Keith, Josh & Vicki can act as your behavioural coach to urge you to stay the course. They are a source of fortitude, patience and discipline. In all likelihood they will advise you to sell bonds and buy equities, just when you feel like doing just the opposite. Be strong and heed their advice.
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We thank you for the trust you have placed in us, and we hope you and your family remain healthy and safe.
Please be aware that the information we have shared in this Insight is for information purposes and is not individual advice. We make a conscious effort to check that all links to third party websites remain active and correct however we cannot take responsibility for their content or their availability.