If we asked you what the biggest risk to your investments were, how would you answer:
- Stock market crashes?
- Oil prices?
- Global warming?
If you answered “yes” to any of those you would, we are afraid, be wrong.
The answer is you.
Ok, before you take offence, maybe not you, at least if you have listened to us, but investors generally, and more specifically the decisions they make.
Markets, by their very nature, rise and fall in value. The natural economic cycle, coupled with individual events, such as Brexit, dictate, in no small part, the direction of the markets. Some will cause them to rise, others to fall and it’s at those times that investors (not you of course as you’ve listened to us) are at their most dangerous.
When markets fall the headlines in the mainstream media often scream about the billions that have been wiped off the value of companies. As an aside, we rarely see the same publications report the opposite. The morning after a large rise in the value of the FTSE 100, do we see headlines announcing the fact? No. But, that’s another article, for another day.
Back to markets.
When they fall, the natural temptation for many investors is to panic, try to blame others, and consider cashing in your investments.
The right thing to do of course is, remember that markets will recover, that you’re investing for the longer term and that the only way to guarantee a loss is to head to cash; which if you do will crystallise your loss and make the situation worse as cash is almost guaranteed (currently at least) to provide a return lower than inflation.
Our most important job
As financial planners, we spend much of our time understanding your goals and objectives and putting a plan in place to achieve them, while recommending the right products and tax strategies.
We have another role too. To educate our clients so they avoid making costly mistakes when the inevitable happens and markets fall. At these times, we are here to remind you of the key investment fundamentals and, if appropriate, save you from doing the wrong thing at the wrong time.
Remember Warren Buffett
Perhaps the most successful investor of all time, and certainly one of the most well-known, Warren Buffett, has many wise words about the fundamental principles of investing.
Attitude to risk: You should only invest in assets which match the risk you are prepared to take. Any losses, however temporary, should never make you feel uncomfortable. If they do, you should probably review your attitude to risk.
On the subject of risk, Buffett says: “Risk comes from not knowing what you’re doing” and “You shouldn’t own common stocks if a 50% decrease in their value in a short period of time would cause you acute distress.”
That’s where working with a planner, who uses tried and tested techniques to identify your attitude to risk and match the outcome to the right investment strategy, comes in to their own.
Markets rise and fall: Investing is for the long-term, a minimum of five years, but preferably far longer. The most successful and content investors are those who invest, then sit back to let their markets do their thing. Secure in the knowledge that their financial plan has been well put together, their investments are diversified and can ride out market corrections.
Warren Buffett again: “Over the long-term, the stock market news will be good. In the 20th century, the United States endured two world wars and other traumatic and expensive military conflicts; the Depression; a dozen or so recessions and financial panics; oil shocks; a fly epidemic; and the resignation of a disgraced president. Yet the Dow rose from 66 to 11,497.”
Timing the market: Frankly, some investors try to be too clever; attempting to find the perfect time to invest, or pull out of the market.
This risk of course is that they get the timing wrong and that costs them dear.
Back to Buffett: “Calling someone who trades actively in the market an investor is like calling someone who repeatedly engages in one-night stands a romantic.”
The long-term: Sure, there will be turbulence along the way, but over the long-term, markets generally rise.
You should therefore be prepared to invest for a considerable period. Consequently, you can ignore the natural rise and falls, safe in the knowledge that, in the long run, it won’t affect your carefully constructed financial plan.
On the subject of long-term investing Buffett says: “When we own portions of outstanding businesses with outstanding managements, our favourite holding period is forever.”
As we’ve said earlier, heading to cash, when markets fall, is almost always the wrong action to take. Buffett, suggests a different perspective: “So smile when you read a headline that says ‘Investors lose as market falls.’ Edit it in your mind to ‘Disinvestors lose as market falls—but investors gain.’ Though writers often forget this truism, there is a buyer for every seller and what hurts one necessarily helps the other.”
Back to the original question
“Events dear boy, events.” is how Harold McMillan is reputed to have answered when asked by a journalist about the most likely thing to blow a Government off course.
The same could be said of some investors, but only if they fail to follow the fundamental principles of investing.
Our clients, of course, don’t need to be concerned; they are well-educated, know they have a robust financial plan and, if they momentarily forget those fundamental principles, we are there to remind them.