October 14, 2022

Discipline is the best defence

Successful investors are patient investors, they understand that there is always going to be ebb and flow in the markets, but with the right strategy these challenges can be overcome.

Discipline is the best defence

When you think about how 2022 has been financially, it wouldn’t surprise me if you’d seen it characterised by inflation, rising interest rates, falling markets, and being a year to forget. It’s true that there have been negative returns this year and it’s all been a bit pants.

The thing is, there’s no getting away from negative returns– they’ve been pretty much spread out across all asset classes, and there is no magic solution to suddenly fix that. So, why am I bringing this up? Am I adding salt to the wound? No – that’s not what I’m doing at all.

I’m here to tell you that yes, it’s been a pretty awful financial year – but downturns are normal, and they’re to be expected. They don’t last forever, and although it might be tempting to cash out and call it a day, historically the worst days on the markets are followed in short order by the best ones, and if you try to jump in and cut your losses – you’re potentially going to miss out on a substantial uptick in their value.

Successful investors are patient investors, they understand that there is always going to be ebb and flow in the markets, but with the right strategy these challenges can be overcome.

When advising client I always look at the facts and similar to a thesis it’s important to evidence the facts. I have based this month’s newsletter on independent research carried out by Vanguard. I have upload their document to my website, please click here.

Downturns are normal

As I’m sure you’re aware, the stock market is constantly in motion, with prices going up and down as external factors, such as economic situations, business actions, and consumer confidence, impact the value of a company’s open market value.

These can come about through changes in interest rates, political events, a shift in the economy, etc – and it’s perfectly natural, downturns, upswings, and market corrections happen all the time. We have seen this consistently throughout history most recently through COVID. Before that we had the European debt crisis, the three words spoken by ECB President Mario Draghi marked the turnaround of the euro crisis…’Whatever it takes’. This phrase provided the markets with confidence, which should never be under estimated. Currently the markets does not have confidence in our government.

Timing the market is futile

In short, no – trying to time the market is futile and practically impossible. For example, the recent underfunded budget announcement sent the pound spiraling, which caused bond prices and share to fall. Whilst the support to consumers energy bills was already known – it was a surprise to hear about the removal of the top rate of tax (which the Government have since back tracked on).

The cost of cutting the top rate of tax was relatively small compared to the cost of the energy price cap, meaning you could have been forgiven for thinking (and in my opinion what the government was relying on) that this announcement wouldn’t have spooked the markets.

However, confidence in the government fiscal policies has been eroded not necessarily due to whether the UK can’t afford this tax cut (let’s leave this down to the economists) but the fact it wasn’t expected, and full costings were not offered at the same time.

This sort of unexpected announcement and reaction is a clear example of why market timing just isn’t possible.

What can you do to protect your investment?

Just like the phrase that warns us not to put all our eggs in one basket, investment in the stock market is best when it’s diversified (spread across different asset classes).

All our clients’ portfolios are well diversified, ensuring that they’re aligned with their individual ‘attitude and tolerance for risk – and we use the best funds (constantly being reviewed) in each asset class to achieve market returns that is aligned to our investment philosophy.

Should you be reactionary to stock market downturns?

No, as we mentioned, the smart investor is a patient one. When a patch of volatility hits, it’s best to tune out the noise. Your portfolio has been specifically designed with your own idea of risk and tolerance for it, and this includes market downturns.

The key here is not to race into making hasty decisions or cash out too fast (as we said, some of the best stock market days often closely follow the worst) – if you want to have a chat about your portfolio, and get a bit of extra advice on how your assets have been allocated, and whether your expectations are realistic, please do get in touch, and I’d be more than happy to walk you through any concerns you have!

Our advice

Your portfolio and investments are in good hands. When they’re put together, its done based on evidence and facts, if you leap in and make sudden changes, you could crystalise losses now and make them permanent and real, rather than a temporary dip.

Clients have experienced a downturn this year, but by staying patient, they will experience an upturn again.

Basically, take a very typically British approach to it all: Keep calm, and carry on!

Contact Us

Please give us a call on 07590 835523 or email us at info@midwinterfinancialplanning.co.uk
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