Don’t Take A Giant Leap
Back on the 20thJuly we celebrated the 50thanniversary of the moon landings. I was totally in awe of Neil Armstrong, who took over the piloting of Eagle, from the computer once he noticed that the preselected landing place wasn’t going to be suitable.
Both he and Buzz Aldrin calmly worked together, whilst the vital fuel that would get them home was used to pilot Eagle over the rocky surface to a safe point of touchdown.
It was this calm, panic free approach that saved their lives, the mission and the hopes of the whole planet.
They trusted what they knew to get them through what must have been a terrifying descent. But they stuck to the plan established by NASA and they achieved what they’d all set out to accomplish.
I can’t help thinking that this idea of sticking to a plan, no matter how appealing it may be to abandon it, is a lesson for us all in the current investment markets, as we go through periods of increased volatility.
I say this because, unlike Apollo 11, we are not actually in uncharted territory. History shows us that volatility is a normal function of the markets.
Our long-term journey as investors will have highs and lows. However we should no more emotionally jump from a growing market than we should from a declining one. As reacting emotionally to market volatility could be far more harmful to your portfolios performance, than the market drop itself.
Here’s something to remember
This interesting graph showing the Dimensional UK Market Index returns by year (from 1956 – 2018*), should help put things in some perspective. As we can see, the markets have provided positive returns for investors for 47 of the 62 years shown (that’s 75% of the time).
So whilst it is sometimes difficult to remain calm during a market decline, it is however important to remember that volatility really is a normal part of investing.
Investors, who do seem to be able to time the market, usually do so with more luck than judgment. With the general wisdom suggesting that the big returns in the total performance of individual stocks over time, are usually produced in a small handful of days.
As investors can never really accurately predict when these days will come along, the prudent strategy would seem to suggest that remaining invested during these periods of volatility, rather than abandoning the stocks, means that investors won’t be on the sidelines on the days when the strong returns occur.
In a changing market, knowledge is power
Hear are the most frequently investment questions I get asked in times of volatility:
I’ve been looking at funds with strong past performances; can I assume that they will do well in the future?
Whilst some investors are known for selecting mutual funds based on past returns, research suggests that most US mutual funds in the top 25% of previous five-year returns did not maintain that ranking in the following five years.
So the short answer would be: No, past performance is just that, history. It offers little insight into possible future performance.
Is being a successful investor all about out-thinking the market?
The short answer is to let the markets do the thinking for you. It’s a fair assumption that people want a positive return on any capital they invest. Over time history shows us that the equity and bond markets have provided growth of wealth that has more than offset inflation. So instead of fighting the markets and trying to out-think them, let them work for you. Remember, financial markets reward long-term investors.
Should I think of stepping out of the UK and exploring international investing?
It’s a good question. We all know that diversification can help reduce risks and that diversifying only within your home market limits that benefit. Not only does global diversification extend your investment opportunity; but by holding a globally diversified portfolio, you are better positioned to seek returns wherever they occur.
To give you an idea of the opportunity, according to MSCI UK and ACWI Investable Market Index (IMI), the UK is one country with 364 stocks; whilst the global opportunity for investments ranges across 47 countries with 8,722 stocks.
Will constantly changing my portfolio help me achieve better returns?
As it’s almost impossible to know what market segments will outperform the others, it’s better to avoid unnecessary changes that can be costly.
Can my emotions affect my investment decisions?
There is a vast body of psychological research that shows that we struggle to separate our emotions when investing our money. Just remember that markets go up and down. So kneejerk reactions are usually poor investment decisions.
Every time I hear the news, I’m tempted to make changes to my portfolio,
is that a good idea?
Day to day commentary can make us question our investment discipline. Some news will stir anxiety about the future, whilst other news tempts us to chase the latest faddy investments.
My advice is to always consider the source and to keep your long-term objectives in focus.
I feel like I need to do something – so, what should I be doing?
Get another perspective on things, especially and independent and expert one. Talk with your financial adviser who can help you focus on actions that add value.
Sticking to actions that you know you can control can certainly lead to a better investment experience.
- Create an investment plan to fit your needs and risk tolerance.
- Structure a portfolio along the dimensions of expected returns.
- Diversify globally.
- Manage expenses, turnover, and taxes.
- Stay disciplined through market dips and swings.
Stay on mission
Neil and Buzz didn’t panic. They didn’t cancel the mission, because things looked tough. They trusted in the plan. They stuck to a pre-agreed course of action and rode out the challenges that faced them on the descent to their ultimate goal.
I totally appreciate that market volatility can be a nerve-racking time for investors. However, reacting with your emotions and altering long-term investment strategies could prove more harmful than helpful.
Sticking to a well-thought- out investment plan, ideally agreed upon in advance of these periods of volatility, you’ll be better prepared to remain calm during periods of short-term uncertainty.
As always, if you have any questions regarding your current or future investment strategies, then please contact us at Bridgewater Financial Services where we will be delighted to help.
* Past performance is not a guarantee of future results.