Thinkpiece

01 Dec Thinkpiece

In this update: 

• Market Ups and Downs …
• Quality not Quantity

Welcome to this financial planning update. Here we share some views on various topical points relating to financial planning.

Market Ups and Downs …

The most dangerous words when investing are ‘It’s different this time…..’. Whilst the recent market volatility may appear different, market volatility is nothing new and is ever-present within investment markets.

Experienced investors are not swayed by short-term volatility, and neither should investors with a long-term perspective. One of the most effective ways to damage your long-term prospects, is to react to current market sentiment, as the news is plastered wall to wall with information on ‘how dreadful our Christmas is going to be’ because of the rise of omicron covid cases.

Aside from the human cost, which I am not in any way trivialising for one minute, market volatility always presents an opportunity. However, opportunities in investment markets don’t present themselves like a sweet shop presents itself to a child. Quite the contrary. We get the perhaps unpleasant news thrust every moment into our path by the media.

The stock market is the only market where things go on sale and all the customers run out of the store.

Cullen Roche

Having a properly structured financial plan, with sufficient income available to meet day to day requirements, and a holding of cash to meet any emergencies, is often underplayed, but is a formidable benefit to those seeking to maintain their financial independence.

If you have your foot ‘pressed firmly to the floor’ and are putting your portfolio under considerable pressure, drawing beyond recommended levels, when a market downturn does occur, this will consequently make a noticeable dent in your overall assets. The ideal is to turn off any withdrawals during a market downturn and draw instead from your cash reserves. Then when the storm has passed and markets recover, and they will recover, then it is time to recommence any withdrawals from your portfolio.

These elements are the key to achieving and maintaining financial independence.

For those who react to markets, there is no helping them.

In bear markets, stocks return to their rightful owners.

J P Morgan

The secret then, if there is one, is not to react, but to stick to your long-term plan. Working with a financial planner will help you to keep to the plan. There is much more to being a financial planner than managing investments. Managing emotions and not reacting is of considerable importance.

One has to have an all-weather financial plan. If the markets fall 30%, that should be of no consequence to the long-term investor.

Quality not Quantity

I have seen time and again the effect of focussing on returns, on investing into ‘what’s working now’. For me, this is a recipe for disaster.

One has to focus on the quality of the underlying investments. Then the quantity will follow. Focussing on what’s working now is one of the most dangerous strategies to employ. If you feel that a particular avenue is beneficial, the market will have realised this long before you did.

The market, like any market, doesn’t make mistakes. It moves in cycles. History shows us, the advance is permanent, the declines are temporary. Don’t lose sight of the big picture. Keep your perspective.

If one should have a concern, then let it be inflation. Inflation is the destroyer of wealth. It is largely hidden and surreptitious. It is only recently that we have seen inflation start to bite – with rises in the cost of materials, construction, food and energy prices. These are all in the public eye.

These higher levels of inflation may be transitory, they may have a longer tail than currently policy makers estimate. We won’t know for sure until we’re through the other side.

A well-constructed portfolio of funds that can, as best as possible, ward-off any bad financial weather is a god send. That’s why the selection of a portfolio of effective fund managers can prove highly beneficial….and that’s why taking independent financial advice can be priceless.

Of course, during this time, your adviser will be there to support you with any concerns you may have. But all too often, we find that an investor’s previous experiences are very valuable in telling them to simply do nothing, provided all of the key elements of an appropriate financial plan are in place.

Market declines are a test. The secret is not to react. Remember your objectives and stick to your long-term plan.

Summary

• Don’t assume that volatility is a bad thing. Volatility is perfectly normal. The market isn’t broken.
• Remember that quality is more important than quantity. Get the quality right, and the quantity will follow. Get the quality wrong, and you can forget quantity.
• Remember to consider if you should turn off withdrawals from your portfolio during market downturns.

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

Warren Buffett

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.

We wish you all a very Happy Christmas and best wishes for 2022!

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