Thinkpiece

07 Jan Thinkpiece

In this update:

• On Market Volatility
• Sound Financial Plan
• On Market Predictions
• Approach
• Remember the numbers
• Lessons from 2020

Happy New Year and welcome to this financial planning update. Here I share some views on various topical points relating to financial planning.
 

On Market Volatility

 
I hear all the time on the radio, claims management companies and their opening pitch ‘Have you lost money on a stock-market investment advised by a bank?’ These adverts are run typically during moments of market turmoil and prey upon an inexperienced investors’ fears that something is wrong.

Indeed it may be, but not from an investment perspective, but from a perspective of appropriateness in the first place. Should that person really have been advised to invest if they did not understand what they were doing and why they were doing it? If they did, market volatility would not be a surprise to them.

If you are investing in order to provide security for your future, hopefully through a well-structured and costed financial plan, you are going to come across market volatility. It is inevitable. One should not even consider investing if one is not prepared for this eventuality.

However, market volatility is not loss. Market volatility simply reflects the unpredictability of prices. The stock-market is a story and when the story changes so does the price.

Markets change, soaring in one season and then swooning in another, though always around a constantly rising trendline.

Nick Murray

Sound Financial Plan

 
These experiences beg the question, did these people have a soundly thought out financial plan in the first place?

Essential then to the success of investing, is the importance of having a sound and fully-costed financial plan.

For us, if there is no plan there is no portfolio. It’s a simple as that.
 

On Market Predictions

 
So, only this morning I received an invitation from a respected pension provider to ‘shed light into what we can expect to see from markets, interest rates and tax in 2021.’

This made me chuckle because nobody can predict markets, interest rates and tax. If we wanted a recent reminder of this eternal investment principle, we only have to look at what happened in 2020.

Who foresaw the Covid 19 pandemic, the impact on economies, jobs, international trade and so on?

And who would have predicted that a suitably diversified portfolio of global equities would have delivered positive returns in 2020?

For those of you that know me, you know that I love a quote and there is none more apt than the oft quoted J K Galbraith, the Canadian-American economist, diplomat, public official and intellectual, who wisely said:

Economic forecasting exists to make astrology look respectable.

J K Galbraith

Approach

 
So how do we approach our financial planning if we have such market unpredictability and change, and we cannot rely on economic forecasts? We must look at variables that we can control, not those that we can’t.

For example, experience of effective and efficient financial planning shows us that we can control our expenditure during difficult times.

For those drawing from their portfolios to support their lifestyle, pound cost ravaging-is the destroyer of wealth. A disciplined and appropriate drawdown strategy will ensure that you never run out of money. The lesson then is to cut back if you can, or importantly use your emergency fund that you would have been advised to put in place to draw from until markets recover. Then you can replenish your emergency fund too.

You would not be human if you did not feel a little unnerved at times when you see the media reporting. However, experienced investors do not let their emotions lead them to a position where they act upon their fears.

Of course, this is entirely what the media is designed to do. The media does not have your financial best interests at heart.

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

Although investment markets are volatile, they are not broken. This is an eternal financial truth and will never change as long as we have a system of capitalism, which is imperfect but demonstrated to be the most balanced structure that mankind has come up with so far.
 

Remember the Numbers

 
A long-term perspective of the stock markets will tell you that they rise 75% of the time and fall 25% of the time. This is simply the natural consequence of markets.

We have seasons in nature, and we have seasons in markets. Remember that people would not invest if this was not a long-term proven way of making money.

All one is simply doing when one invests is putting money (hopefully – in conjunction with advice from your trusted financial planner) into the best businesses in the world in order to see them use your capital to provide profits and return them to you, the investor. This could be reflected in the share price of the company, the dividends payable, or a combination of the two.

Therefore, do not view your portfolio or judge its success over a short timeframe, particularly during periods of market volatility. If you have a well-structured, fully costed and well laid out financial plan, you should not even raise an eyebrow during periods of downward market volatility. In fact, I wouldn’t recommend that you look at your portfolio at all and certainly only in conjunction with your trusted financial planner. Your portfolio valuation is going to tell you nothing about where we’re headed or what you should do.

The lesson then – Do not let the markets inform your planning.

Lessons from 2020

 
For many inexperienced investors who have not invested through such market turmoil as the financial crisis of 2008, 2020 would have posed a particular challenge to their conviction around their decisions to invest.

For those that act on their fears, one can do little to help them.

For those experienced investors and those seriously planning their long-term strategy, nothing has changed and they are wise enough to know that they should stick to the plan.

Any fool can know. The point is to understand.

Albert Einstein

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.

Best wishes to all for 2021.

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