Thinkpiece

05 Aug Thinkpiece

In this update: 

• The Big Picture
• The importance of portfolio rebalancing
• Withdrawal discipline

The Big Picture

It can be difficult to see the big picture when all that we are exposed to, driven by the media machine, appears only to be chaos and disorder. 

The good news is rarely reported. The peaceful and harmonious elements of our lives do not make the front pages.

When reviewing our financial plan, it is important that we see the big picture. We can learn to take a longer term perspective and tune out the short term noise. 

Minimum exposure to the media should be a guiding principle for someone involved in decision making under uncertainty – including all participants in the financial markets. 

Nassim Taleb

Behaviours that work in most areas of life do not necessarily apply to investment. Research shows that investors too often sell when they should buy and buy when they should sell.

Our life experience tells us to be cautious in difficult times and to take advantage of good times, ‘make hay while the sun shines’! In financial markets, this sound wisdom does not always apply.

All too often, people apply short term thinking to long term assets.

Research shows that most investors travel in the wrong direction, selling when they should be buying and buying when they should be selling. In almost every type of market, investors lose money when they try to respond to news, or to anticipate events.

It’s interesting to compare when investors shift their money, and the performance of the funds in which they invest. Data reveals that annual gains are rarely more than 0.2% over ten years, but that losses over ten years often run to 1—2% a year.

The best course is almost always the simplest: stick to the plan agreed with your adviser.

When an investor focuses on short-term investments, he or she is observing the variability of the portfolio, not the returns – in short, being fooled by randomness.

Nassim Taleb

The importance of portfolio rebalancing

Because different assets perform differently, the initial asset allocation will drift over time. Higher risk assets will tend to outperform in the medium to longer term, altering the risk profile of the portfolio. Regular, disciplined rebalancing will keep the portfolio aligned with client goals.

A portfolio consisting of different assets will need to be rebalanced over regular periods to keep it in line with client goals.

Higher risk assets (typically equities) will tend to have higher returns over the long term and will gradually begin to dominate a portfolio that is not rebalanced.

Ensuring that the portfolio is rebalanced in a regular, disciplined manner helps to keep it within its required risk limits and focused on planned returns.

Withdrawal discipline

A portfolio of £100,000 for example, can seem like a lot of money. The problem lies in that an investor can look at the principle sum, and not the income potential that such a sum could provide.

It would be very easy for most people to find things to spend £100,000 on. But drawing a sustainable level of withdrawals or income is not so easy. However, if we are to have a sustainable means of supporting ourselves through semi and full retirement, we must apply discipline, or we could face the consequences of our actions at a later date.

If you draw at more than 4% per annum from a typical medium risk portfolio (as defined by us), you risk eating away at your underlying capital. 

The best math you can learn is how to calculate the future cost of current decisions.

J.J. Watt.

Your opportunity

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 value of investments can go down as well as up. You may end up with less back than you have paid in. Past performance is no guarantee of future returns.

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