It’s often said that our role as Financial Planners is to manage client behaviour, not to manage their money.
When investment markets are volatile, managing our own behaviour is what makes the difference to long-term results; we can allow fear to cause us to sell once markets have fallen, turning paper losses into real losses, and then wait for markets to recover before re-investing the cash.
As Carl Richards once illustrated in a cartoon, greed/buy, fear/sell, repeat until broke!
The FTSE 100 index of leading UK company shares took a minor battering today, closing down 1.5%, or 108.45 points at 7,334.98 points.
Across the pond, our transatlantic neighbours were having a much worse day on the markets.
The Dow Jones Industrial Average closed down 1,175 points or 4.6% at 24,345.75. To put this one day fall into some context, it’s the biggest since the global financial crisis in September 2008.
The fall in the broader S&P 500 index (remember the Dow Jones only tracks 30 stocks, so movements tend to be more volatile) was 3.8% and the technology-heavy Nasdaq was down by 3.7% on the day.
These are not exceptional market movements, only newsworthy because they are perhaps long overdue in the normal scheme of things.
Global equity markets and investors have experienced a very good run over the last decade or so. In 2017, the Dow Jones rose by nearly 25% and didn’t demonstrate much in the way of volatility either.
Anyone who has heard me talk about investments in the past two or three years will have heard me say that a market correction was overdue.
Of course what we’re seeing today, and to some extent at the end of last week, might not be the start of a market correction. It could just be investors taking a little profit.
We’re bound to see the media and other commentators put forward lots of very plausible reasons for this sudden spike in market volatility.
No doubt many will point to fears of rising interest rates.
We’re at the point now in the economic cycle where growth is sustainable and interest rates can rise, in order to ward off rising price inflation.
Equity markets are artificially inflated right now thanks to years of quantitative easing, which in the US at least is being gradually tapered away. Initial reaction to this tapering away of asset purchases was incredibly muted when announced last year; could the reality of QE being removed now be sinking in?
As for those gentle words of reassurance, here you go.
Volatility is the price you pay for participation in equity markets and for the potential for higher returns than cash.
We’re long overdue a market correction which is a normal part of the market cycle and happens from time to time. It’s nothing to fear, just a part of how equity markets operate.
Our clients with any money exposed to global equity markets all share a number of important attributes.
Firstly, they are long-term investors. This attribute makes short-term market volatility less important.
Rather than looking at how an equity market performs during the course of an hour, day, week, month or even year, we’re interested in multi-year investment returns.
Secondly, our clients are all suitably diversified. This means that equities are not the only element within their investment portfolios.
This diversification is important because different investment types are generally negatively correlated; they tend to behave differently at different times.
Having a well diversified portfolio softens the blow of any short-term volatility in equity markets, as you are never fully exposed to UK, US or global stock price movements.
Thirdly, we take careful steps to assess your attitude towards investment risk, your risk capacity and your need to take investment risk in order to achieve your financial goals.
This deep understanding of investment risks means the volatility as we witnessed today should be tolerable in terms of your emotional response to the event and your financial ability to withstand falls within your portfolio.
Despite these three very important attributes, it’s only natural that market volatility prompts some nervousness. If you’re feeling at all unsettled, we want you to call us and chat about it. That’s what we are here for.
In fact, our job as Financial Planners has been remarkably straightforward for the past decade; meeting our clients each year to present rising investment valuations is a lot easier than explaining losses.
When equity market volatility is abound, that’s when we really earn our fees by explaining what is happening and how it fits into your overall financial planning.
