Thinkpiece

02 Dec Thinkpiece

In this update: 

• • Patience

Patience

A great deal of time and energy is given to take action in some spheres of financial planning and portfolio management, in a rush to ‘fix’ the current situation, namely the likely fall in one’s net worth during turbulent times.

We can feel a need to take action, to do something, to tinker, to switch to this or that to make it better, make it go away. Very often this very action can prove counterproductive. A classic example is where someone seeks to invest into ‘what’s working now’. This is always a dangerous approach.

The stock market rewards the patient and punishes the rest.

One must learn when one should move, and when one should stay still and hold the space….wait things out. This can come personally from experience (often through not following this principle in the first place) or by seeking professional counsel and advice. 

The truth is that from time to time, as investors, we must be patient. There are always greater things playing out which are beyond our control.

The difficulty comes in that the (stock) market doesn’t know our timing, and it wouldn’t change it’s behaviour if it did. This is why one must have an appropriately structured plan around our money (portfolio), including a healthy margin of safety (cash) to help see us through any temporary fluctuations.

Cash combined with courage in a time of crisis is priceless.

Warren Buffett

………and they are very much temporary, but we often don’t see it, tied up in too much short-termism.

History shows us that markets do from time to time have corrections (a fall of greater than 10% from the previous market high, which occur on average once per annum) and that typically between 1 in 4 to 1 in 5 of these become bear markets (a fall of greater than 20% from the previous market high).

The rest of the time, bull markets will feature (a rise of greater than 20% from the previous market high). The advance of markets is permanent, the declines are temporary. 

Looking at the S&P 500 Index throughout the U.S. Bull and Bear Markets since 1942 is helpful. Looking at the history of the market’s expansions and recessions helps to gain a fresh perspective on the benefits of investing for the long-term.

What this information shows us is that the average Bear Market period lasted 11.1 months with an average cumulative loss of -31.7%, whilst the average Bull Market period lasted 4.4 years with an average cumulative total return of 155.7%. So you’ve got to be in it to win it!

Most people remember the downturns, but forget the major upturns in bull markets.

Stocks don’t go up on time. Stocks go up over a period of time.

The real key to making money in stocks is not to get scared out of them.

Peter Lynch

If we look at the bear market in 2008, the S&P 500 fell 48.2%. In the following 11 years it rose by over 400%

It’s hard to accept though isn’t it. If one has gone through steps to ensure that the principles of true investing have been followed (and this isn’t common), then even the most gold-plated portfolio will suffer temporary falls, due to the environment and the systemic risks that naturally exist.

We call this volatility. Volatility is not loss. Every portfolio will experience volatility. With this volatility, remember that every market has it’s opportunities. The important thing is to ensure you remain invested to benefit from them.

A selection of suitably diversified high quality fund managers put together through thorough research and due diligence will stand the test of time.

Bull markets are born on pessimism, grown on scepticism, mature on optimism and die on euphoria. The time of maximum pessimism is the best time to buy, and the time of maximum optimism is the best time to sell.

Sir John Templeton

Although potentially scary, for those that regularly follow this blog, you will know that markets climb a wall of worry. Bear markets, like the one we are currently experiencing, are perfectly normal.

If you are drawing down on your investments, it is time to fall back on the financial structure that you have put in place with your financial planner and use the margin of safety you have in place to support you during this time.

For those accumulating those assets, these times are referred to as the big sale for a very good reason. You are buying into markets at discounted prices. But advice must always be sought.

If you wait for the robins, spring will be over.

Warren Buffett

The bottom of the market will form in time before we go off into the next bull market.

In the meantime, remember that financial success is behavioural.

When the time comes to buy, you won’t want to.

Walter Deemer

Summary

• Remember that every investor has to learn to be patient from time to time.
• Focus on what you can control.
• Volatility is not loss.
• If you are drawing down on your investments consider using your cash (margin of safety) instead.
• Take a long term view.

If you’ve not yet put in place a sound financial plan and you’d like to know more, please feel free to contact us on
01626 305318 or via email here.

The views expressed are not to be taken as financial advice. Professional advice should be sought before proceeding.