What to do when uncertainty abounds? Dr Benjamin Holdsworth on why taking a long-term investment view is key.
At the time of writing, authoritarian states are flexing their muscles: Russia violating Ukraine’s sovereignty and China’s ongoing subjugation of Hong Kong with the new National Security Law alongside its apparent support for Russia being cases in point.
The world is looking gloomy and we are rightly concerned when watching the humanitarian cost of such acts on the news.
The West continues to struggle with what is hopefully the back-end of the Covid crisis as populations gather immunity through vaccination and infection as new drugs and treatments come online almost daily.
Economically, the greatest challenge is soaring inflation, hitting levels not seen for several decades. As a consequence, interest rates and yields on bonds have started to rise and global equity markets have started the year down. This, too, can feel unsettling.
It is always easy to feel that the present is more uncertain than the past.
We have all but forgotten the Armageddon scenarios of events such as the Y2K software bug issues of 2000. Planes were expected to fall out of the sky, nuclear power stations were thought to be potentially out of control, and so on.
Then there was the emotional and geopolitical impact of 9/11 or the fear many felt in 2008 when Lehman Brothers failed and the meltdown of the financial system was a real risk.
The chart below shows the growth of £100 from 1998 to 2022 and illustrates that over the longer-term, financial markets have ultimately absorbed the consequences of these events and delivered steady forward progress.
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. Its use in this chart does not constitute any form of recommendation and is provided for educational purposes only
Being shaken out of markets based on today’s news is about the worst mistake any long-term investor can make.
This is why one of the most important roles a financial planner takes on is that of behavioural coach – stopping investors from doing more damage than the markets can.
Feeling concerned by what geopolitical events might mean financially? As ever, all the news that we see and worry about – including the invasion of Ukraine by Russia – is already reflected in market prices.
‘New’ news, as it develops, will have an influence on those prices, but, by its very definition, this is a random process that is hard to benefit from unless you own a crystal ball.
It is likely that markets will be volatile as events develop. The US market actually rose on the day Russia invaded.
In terms of direct portfolio exposure, it is worth noting that Russia represents around 0.35% of global equity markets, and that is before this is diluted down in any portfolio by bond holdings.
To put this in perspective, the global market weight of Apple is over 4%! In fact, Apple’s cash reserves alone are of a broadly similar magnitude to Russia’s entire market capitalisation.
No one has any real idea as to the wider impact of the Russian invasion, but even if markets fall, we need to remember the following points:
Equity markets can go down – sometimes materially – as part of their journey to delivering positive longer-term returns after inflation.
Unless you require immediate liquidity from your equity positions, you should not take action. Feeling uncertain about markets is not a valid reason for seeking to get out of markets.
Selling risk assets at a time of market uncertainty can ultimately prove ill-advised, unless your personal circumstances have changed to the extent that you need immediate liquidity from your portfolio.
The high-quality bonds in your portfolio provide more stable values and the liquidity to meet any liabilities without having to sell equities when they are down.
While it is natural to be concerned by the dramatic events we see reported, your financial investments should not add to those worries.
If they do, it is time to lean on your adviser for support.
Dr Benjamin Holdsworth (right) is a director of Cavendish Medical, specialist financial planners helping consultants in private practice and the NHS
The content of this article is for information only and must not be considered as financial advice. Cavendish Medical always recommends that you seek independent financial advice before making any financial decisions.
Levels, bases of and reliefs from taxation may be subject to change and their value depends on the individual circumstances of the investor. The value of investments and the income from them can fluctuate and investors may get back less than the amount invested.