Thinkpiece

23 Dec Thinkpiece

In this update: 

• • 2022 in perspective
  • Your financial planning journey

2022 in perspective

As I’ve previously written, markets correct once a year (a fall of more than 10%, but not more than 20%), but the majority of the time these falls are fleeting.

Every year, at some point, equity markets lose money. Every year, at some point, the market is lower than its all-time high.

Approximately 1 in 5 of these corrections deepens to a fall of more than 20% from the previous market high. We call these bear markets. I am sure it will not come as a surprise to you that we’re currently in a bear market.

But those bad periods don’t last. Eventually, most years, the market rises. And even if it falls, it’s never as catastrophic as the worst points might lead you to believe.

The chart below shows that experience. The red dots show the worst drawdowns in a year, but then the blue bars show what the ultimate return was for the same year.

As an example, in 2020, the S&P 500 fell by 34% at one point. BUT…it ended the year 16% higher than it was on January 1^st:

Source Bloomberg / 7IM

Interesting Statistic

Going back to 1980, the average drawdown is 14%. That’s a pretty scary number to be experiencing once a year!

BUT. The average annual return is +11%. That’s a 25% swing.

It’s another good example of how our emotions can play havoc with our investing.

We cannot control the markets, but we can control how we react….

Your success entirely depends on how dispassionate you are towards short-term stock price fluctuations.

Joel Greenblatt

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 can enjoy Saturdays and Sundays without looking at stock prices, give it a try on weekdays.

Warren Buffett

Your financial planning journey

It’s important to remember that financial planning is not an event – it’s not a one-stop shop! It’s a journey. Your plan must evolve as your life and experiences evolve, coupled with the impact of external circumstances.

Financial planning needs careful attention, like tending to a garden. If you prune the roses every day, you’ll end up with no roses! Equally, if you don’t attend to the garden, it will become overgrown.

Take the time to plan effectively and efficiently, ideally with your trusted financial planner, and then step back and live your life.

There are no shortcuts to any place worth going.

Beverly Sills

Summary

• Take the rough with the smooth. Fluctuations and negative years are part of investing.
• 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.
• Ensure you tend to your financial plan. Not too much, not too little.

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.

Wishing you all a very Happy Christmas and best wishes for 2023, from all at Stover Financial Planners.

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