Of course, sometimes that’s easier said than done. In this post, we’re looking in greater depth at instability in today’s markets and some of the vital questions many investors will have.
1.Will it get better?
At the heart of the current volatility is rising inflation. It’s a global problem that’s costly for consumers, the economy – and the stock market.
It’s at a 40-year high in the UK, and forecast to reach 11% this year, prompting headlines asking whether we’re seeing a return to the chaos of the 1970s, where inflation and unemployment rose but economic growth was slow.
But this isn’t a fair comparison.
You can draw some parallels between the two periods (think oil prices, for example, or strike action) but the overall backdrop is now completely different.
For a start, the sort of things we spend our money on – our phone contracts or Netflix subscriptions – didn’t even exist then. The nature of the goods and services we use and what we’re prepared to pay for them has totally transformed.
What we all need to consider as investors is, no matter how alarming the data on inflation, GDP, or recessions, it’s already in the past. These are backward-looking measurements telling us what’s already happened.
By comparison, the stock market looks forward. As investors buy and sell shares, they take into account what they think will happen with inflation in the short term. So, when you look at any major index, to a large extent, it’s already priced in.
So, will things get better? The short answer is yes. How do we know this? Because it always has.
2. But when?
We can’t know exactly when the economy will pick up again, although the Bank of England anticipates inflation will return to a more manageable level after 2023.
But thinking purely about your investments, previous experience tells us the next recovery is never far away.
We tend to look at financial markets in terms of ‘bears’ and ‘bulls’. A bear market, in very simple terms, is when stocks fall and keep on falling. A bull market is when share prices keep on rising.
The main thing to remember is, bears are short. As this graphic of the FTSE All Share shows, since 1945, the index has seen 64 bull years, but spent just 11 years in a bear market. It’s up far more than it’s down.
3.Why should I stay the course?
When share prices fall sharply, or when they’re constantly up and down, it might be tempting for some investors to change course, even going as far as taking money out of the market and waiting until things improve.
This is a costly tactic. Timing the market to avoid the worst days might mean you miss the best days as well.
There’s a good example to illustrate this. Imagine you’d been able to invest in the S&P 500 as far back as 1930.
Miss the 10 best days of every decade and 90 years later, your investment would have grown 28%. But ride out the rougher times, staying invested, and the total return leaps to a rise of 17,715%.
It’s always worth remembering that, even if you see your investment drop 20% in a bear market – that’s 20% from its peak, not your initial investment. Previous experience tells us that better times should lay ahead, and you’ll still end up better off over the long term.
4. What does an adviser do?
Of course market turbulence can still be nerve-wracking. Nobody likes seeing their investment drop in value, even if it’s only temporary.
Just recently, I had a call from a client who was worried about what impact the current environment was having on their investments.
The key question I asked was, “What do you need it for?”
They’re retired, in their 60s, and drawing down enough income from their pension to meet their needs. They’ve also got enough cash reserves in the bank – just in case.
So, the money that’s invested isn’t needed now, it’s for the long term. As long as I help them continue to invest it wisely, it should be ample for them to keep achieving their financial goals for a long time yet.
While this is a simple example and every client is different, understanding a client's circumstances is a key ingredient when it comes to implementing a great investment strategy.
We make sure you’re in the best funds possible: are your investments diversified to cope in different market environments? Do you have the right blend of income and capital? Most importantly, does your strategy match up with the levels of risk you’re prepared to take? These are the questions we answer.
But we also take a wider view: do you have sufficient cash in reserves for when you need it, are the funds we’ve helped you select performing as they should?
And, if your plans change, we help you adapt your financial strategy.
There’s no magic wand
Unfortunately there’s no approach that will make you completely immune to changing market environments. But I can help you stick to your core principles that should mean you avoid a negative impact further down the line.
That means that whether it’s dependable income that lasts the rest of your life, or building a legacy to pass to grandchildren, it’s all in the plan.
This shows how crucial financial advice is to selecting the right investment strategy and helping you to stay the course.
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. Your eventual income may depend upon the size of the fund, future interest rates and tax legislation. Past performance is not a reliable indicator of future performance.