Inflation and a global cost-of-living crisis, armed conflict in Ukraine, political strife in the UK. And through it all, financial markets have been swinging up and down.
But with everything that’s happening, it’s important we don’t panic. It’s easy to fall into the trap of ‘discounting the future’ but focusing too much on the problems of the present can impact our investments in the long run.
To illustrate this, let’s look at two different families.
We’ll call them the Reactives and the Patients:
Jane and Mike Reactive pay a lot of attention to the news and they’re worried.
Each time the market drops, they watch their pension and investment funds lose money. As far as they’re concerned, that’s bad news for their financial plans.
Their neighbours, Kate and John Patient however, see things differently.
They’re just as informed, and experiencing the same market conditions, but have an altogether more calm and measured approach to investing.
Let’s take a closer look
The Reactives change their investments based on what’s happening in the here and now, buying and selling positions, moving into sectors that are doing well, and even shorting stocks of companies they think are doing badly.
But the Patients base their investments on what’s happening in their own lives and their own financial plan – not what’s going on elsewhere. They keep their portfolio diversified with a broad range of investments designed to see them through different market environments.
The Reactives monitor their investments every month, logging in to their investment platform to check on progress.
But the Patients know Rome wasn’t built in a day. They know it’s a bad idea to risk bulldozing the foundations of a sound investment strategy.
The Reactives are always looking for the Next Big Thing. They’ve tried alternative investments and unregulated markets like cryptocurrency. And when the market moves get too much, they switch their assets into cash – despite the dangers from inflation over the long term.
But the Patients are reassured by the facts. They’re sticking with what works.
The Reactives fear that taking no action will do them harm.
But the Patients know that the decision not to change paths is a decision within itself. They understand the long-term benefits of staying invested to the plan.
So, how did this work out financially for both families?
Fast forward to retirement and the Reactives are still worrying about not having enough. Meanwhile, the Patients are already enjoying the benefits of a long-term strategy – they’re relaxing on the beach with a cocktail in hand and without a care in the world.
As proof of how this might have actually played out, we can go back to recent events. When markets plummeted following the start of the pandemic, some investors panicked and moved their assets into cash with the aim of buying back in when things looked more favourable.
The chart below shows just how bad a strategy that can be. It means ‘timing the market’, a near impossible task as you have to be right twice (when you sell and when you buy back). People trying to time the market may have sold out and bought back in at any time, however for the purpose of my example I have used the two weeks before the first national lockdown and buying back in 12 months later:
Person A – a patient investor – didn’t sell off, even when their strategy dropped when the pandemic hit. Two years later, their portfolio (a typical 60% equity/40% bonds strategy) is up nearly 30% from its lowest point.
Person B – the reactive investor, tried – and failed – to time the market. Missing out on the market’s bounce back, their assets are roughly at the same level when they sold out.
So what’s the secret of the Patient family’s success?
Well the Patients have a financial adviser who created a long-term financial plan for them aligned to their attitude to risk and long-term goals. It’s a plan focused on evidence-based returns and the diversification of assets.
They also benefited from ongoing support from their adviser who coached them through the highs and lows to help them to stay on course.
The Reactives also have a financial plan, but have forgotten all about it, discounted it and their adviser’s support and failed to attend their review meetings or listen to their advice. They’ve taken things into their own hands, and crucially, damaged the size of their investment portfolio.
As Mike Tyson once said, “Everyone has a plan until they get punched in the face”. Being patient is extremely difficult, particularly in the face of stock market falls like two years ago, or in the current market volatility.
But it’s what will often make the difference between being a poor or a successful investor.
This post is for information purposes and does not constitute financial advice, which should be based on your individual circumstances. The value of investments may go down as well as up and you may get back less than you invest.