Thinkpiece

03 Aug Thinkpiece

In this update: 

• • Market Seasons
  • Financial Behaviour
  • Your Financial Plan

Market Seasons

As regular subscribers will know from previous posts, the markets go through their seasons. The business cycle goes from expansion, slowdown, recession and recovery. Stock markets move between bear and bull markets. However, we spend more time in bull markets thankfully, than bear markets.

The current bear market has been around for approximately 2 years. The average length of a bear market has historically been 11 months.

So we can see that this bear market has become protracted.

In terms of sustaining our financial wellbeing, how we behave during these moments can make all the difference.

Markets act irrationally in the short term, pricing businesses based on market jitters. The price of one’s current portfolio can be like trying to get a broken barometer to provide an accurate reading. As the market uncertainty and bad news flows, so does the unpredictability of the short term market. 

The long-term market prices businesses based on their earnings. 

This is all normal and any seasoned investor will not be swayed or spooked by this and will certainly stick with their long-term objectives. 

If a man knows not to which port he sails, no wind is favourable

Seneca

Financial Behaviour

Key here is having a good structure around one’s finances. Our ‘behaviour’ at this point can make all the difference.

I have talked many times about ensuring that a sufficient emergency / cash resource is in place. It is at times like this that one becomes thankful for having such a resource, which can seem like a waste of time when stock markets are soaring.

If one is drawing from one’s portfolio during bear markets, it is sometimes appropriate to stop or reduce those withdrawals, and use one’s cash resource, until the storm passes.

This storm is a protracted one, but when inflation weakens, and it may do so outside the UK before the UK itself shows signs of slowing or weakening inflation, then one’s portfolio can recover any paper losses sustained during the bear market, when the next bull market begins……..provided one is patient enough.

A permanent loss in a well-diversified equity portfolio is a human achievement of which the market itself remains incapable.

Nick Murray    

..but if during the bear market you have pushed your portfolio to provide income or capital at a time when it wasn’t supported by markets, or you drew beyond the potential of your portfolio, then you’re asking for trouble. You will begin to eat your golden goose…………the likely source of your financial independence.

So, mind your (financial) language and behaviour.

Your Financial Plan

One must not do what one has always done. We must ensure that our response or action is appropriate to the circumstances. One must adapt. 

By budgeting well, measurement drives discipline, which in turn drives behaviour, stopping us from overcommitting ourselves or overspending, and inadvertently killing our golden goose!

When the facts change, I change my mind. What do you do, sir?

John Maynard Keynes

Bear markets are common. And being patient has ALWAYS worked for the diversified investor. Nobody likes this advice, but the truth doesn’t change because of a recipient’s refusal to accept it.

A budget tells us what we can’t afford, but it doesn’t keep us from buying it.

For those that have surplus capital or income, it is time to decide whether that capital would be better deployed to one’s long term financial plan, or paid off debt. Working with a financial planner can help you to make these key decisions, which must be revisited time and time again.

Financial planning is not a one-time fix-all event. One must continue to revisit one’s plan, and adapt as circumstances change, in conjunction with a trusted financial planner. Having a healthy contingency of income, capital, or both, can make or break a plan.

Thoughtful financial planning can easily take a backseat to life.

Suze Orman

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.