Thinkpiece

01 Mar Thinkpiece

In this update: 

• Recent events
• Remember your objectives
• Market Timing
• How successful investors respond

The events of recent days are clearly tragic and devastating for the lives of everyday people who are affected. I always think that at times like this, we see the best and the worst of humanity.

We may feel compelled to help and support those in need, and of course these are noble aims.

From a financial planning perspective, one doesn’t wish to trivialise these events in any way, but sadly they are an all-too-common occurrence. It is difficult to imagine a world where there isn’t some form of conflict or major disruption occurring at one time or another. Think back – when have you ever known a world where there is no uncertainty?

When we experience such unsettling events, it can be tempting to think that ‘This time it’s different. This time the market won’t recover. This time will be like no other time.’

Whilst the outward event is indeed different, from a market perspective we have been here many times before, and we will be here many more times in the future.

Difficult times call for steady heads. Difficult times call for perspective.

Whilst the human consequences could be devastating and long-lasting, from a market perspective, this too shall pass.

Sound investment, you’ll note, is refreshingly dull.

It is doing nothing when everything and everyone is screaming to do something.

Morgan Ranstrom

The difficultly comes in that we will undoubtedly have our own life agenda, right now, that we are trying to achieve. The market does not know that you own it, and its path is not in timing with our own agenda.

No matter how good one’s investment process is, how well designed the allocation is to numerous high quality profit producing companies, negative systemic world events will always override all strategies……………..but only temporarily!

I say it a lot, but markets climb a wall of worry. That’s just how it is. When that worry is heightened by significant levels of uncertainty, volatility is increased.

Volatility however, as I’ve said many times before, is not loss, but only the unpredictability of prices.

A quality company, trading in profit, with demand for its services, does not suddenly become a poor company overnight due to an unpredictable world event.

Therefore, the market gets the pricing of companies wrong. It is imprecise, and certainly at the moment, you’re not going to get an accurate reading of the true value of your investments.

Mr Market’s job is to provide you with prices; your job is to decide whether it is to your advantage to act on them. You do not have to trade with him just because he constantly begs you to.

Benjamin Graham

Remember your Objectives

It’s human nature and entirely understandable to want to move our money into supposed ‘safe’ havens, like cash.

….but stick to your plan. What was the reason you invested in the first place? What were your objectives?

A knee jerk reaction now is not going to help those long terms plans you made. Don’t be tempted, no matter how strong the pull is. Your future self will not thank you for reacting in this way. Your future self will thank you for responding appropriately. There’s a big difference.

The Stock market is a story.

When the story changes, the price changes.

Market Timing

My experience of timing the market, is that those who claim to have been successful at it once, cannot repeat it!

There are 2 problems with market timing – 1. When to come out of the market and 2. When to go back in.

There are only two types of investors – those who know they can’t make money from timing the markets, and investors who don’t know they can’t.

Terry Smith

I have met and spoken to far more people that have lost significant sums than they otherwise would have, had they just simply left their investments alone and done nothing.

No one can say how the events of recent days will play out and what the new normal will look like for the people of Ukraine and Russia. We hope that it is a swift return to a lasting peace.

Sir Isaac Newton, the English mathematician, physicist and astronomer was caught out by trying to time markets, as Benjamin Graham explained in his book, The Intelligent Investor.

And back in the spring of 1720, Sir Isaac Newton owned shares in the South Sea Company, the hottest stock in England. Sensing that the market was getting out of hand, the great physicist muttered that he “could calculate the motions of the heavenly bodies, but not the madness of the people.” Newton dumped his South Sea shares, pocketing a 100% profit totalling £7,000. But just months later, swept up in the wild enthusiasm of the market, Newton jumped back in at a much higher price—and lost £20,000 (or more than $3 million in today’s money). For the rest of his life, he forbade anyone to speak the words “South Sea” in his presence.

Benjamin Graham

Successful investing has nothing to do with intelligence. The key to investment success is emotional discipline.

Of course, investing itself is a means to an end, with that end being to support your financial plan.

You’ll see that I’m quoting a lot of Benjamin Graham in this month’s Thinkpiece. I make no apology for this. That’s because he was a good man and a level head in a crisis, and you can be as well, by sticking to your financial plan and not wavering.

The best way to measure your investing success is not by whether you’re beating the market but by whether you’ve put in place a financial plan and a behavioural discipline that are likely to get you where you want to go.

Benjamin Graham

How successful investors respond

The answer then for investors, is not to time the market, but to remain in it. Stick with the plan.

This is all part and parcel of working with your financial planner and comes built as standard.

Summary

• Don’t assume that volatility is a bad thing. Volatility is perfectly normal. The market isn’t broken.
• Don’t let short term noise inform your long term planning. Remember your objectives – Stick with your long term plan!
• Don’t be tempted into thinking that you can time the market. You can’t!

In investing, what is comfortable is rarely profitable.

Robert Arnott

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.