An important part of our ongoing relationship with you is to provide reassurance, increasing your confidence in your financial arrangements, when others seem intent to spread panic.
The news of suffering being endured in Ukraine over the last two weeks has been incredibly saddening. In particular, the devastating cost to human liberty and life. It’s a deeply worrying situation, as has been the case of many other events in our history. After all, this time two years ago we were getting our heads around the likely impact of a global pandemic.
There’s no doubt unfolding worldwide events do impact the global economy, but no one can ever be sure how the market will react. The Pandemic itself was another example of the economy and the markets responding very differently to the same situation. It’s not until you look at a time frame that spans decades that you can see a strong correlation between the two.
It’s entirely natural for investors to be fearful of the uncertainty brought about by an event such as this. Fear is a natural human instinct, but making investment decisions based on it is usually a very costly mistake. Over the years we’ve had many conversations with people who’ve attempted to time the markets. They’ve shared with us the detrimental impact this has had on their financial future.
As you know, our belief is always to take the long-term view and where possible ignore the short-term noise that surrounds us. The media is driven by a desire to sell more copies/subscriptions/space, so they focus on short-term data, market predictions and reporting negative news.
If an investor acts based on this information, it can have a disastrous impact on both their finances and their peace of mind. Successful investing means staying calm through the inevitable market ups and downs, maintaining your focus on the long-term performance of the markets – curiously something the media rarely draw attention to.
The chart below illustrates that over the mid to longer-term the markets absorb the consequences of significant political and economic events. They power on as companies innovate and grow as they seek opportunities to profit.
Material global events are ever present
Data source: Vanguard Global Stock Index ACC, 4/8/1998 to 14/2/2022 in GBP used as proxy for the performance of global equities.
A few thoughts and facts that may be useful
- You may be surprised to learn that the US market actually went up the day that Russia invaded Ukraine.
- The Russian exposure in a global equity portfolio is only about 0.35%. By comparison, Apple as a company is about 4% of a global equity portfolio. For most of our clients this is diluted further as they hold a portion of their wealth in safe bond holdings.
- All news of what is happening in Ukraine is already reflected in the market prices. As situations continue to develop the information will be reflected in market prices virtually immediately. Without a crystal ball it’s impossible to make informed decisions about what will happen next.
- If you have cash available to invest, a temporary market decline such as this, presents an opportunity. If you invest now in a globally diversified portfolio, you will get more units for your money than you would have three months ago. Liken it to your behaviour when you see your favourite coffee (or any item you regularly consume) on sale at a significant discount.
- Remember that unless you’ve opted for 100% equity exposure, you have an element of your wealth invested in safe bond holdings. They provide some stability to your portfolio and mean you can consider drawing on these for any income requirements, rather than selling equities when they’re down.
- It’s important to ‘zoom out’ when you’re looking at performance data. The MSCI World Index (a good proxy for Global Equity Markets) has gone down by 3.74% in the 3 months to the end of February. But over a year it’s up by 10.74%, and has averaged 10.73% each year for the last 10 years.
- Markets will continue to be volatile as events develop. The best thing you can do is accept this and focus on things you can control.
Having your confidence shaken to an extent that influences your investment decisions, is the most expensive mistake a long-term investor can make. The media has programmed us to seek a sophisticated answer to ‘what to do now’ during times of uncertainty, but the right message for us to share with you is a very simple one. Do nothing. Your portfolios have been built to withstand the ups and downs that the market inevitably throws at us.
Our human nature makes this challenging to practice because your instincts will be telling you to run. I like the anecdote of the person on an escalator playing with their yoyo. It’s important to watch where the person is going, not what the yoyo is doing.
As your Financial Planners, we are here to ensure that Your Big PictureTM delivers your life goals. Amid the uncertainty surrounding us, this must remain our focus. Your investment success is an integral part of this which is why we use decades of financial science to inform our decisions. Long-term investing principles still hold strong and will see us through this storm. Just like they have through every other.
As always, please feel free to call or email us with any questions or concerns you may have, or just for a few words of reassurance.
Please note, the value of your investment can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance.