Trust in the bounce
It is important to keep perspective on short-term falls. Dr Benjamin Holdsworth on the slow process of building and spending wealth.
At times like this, when it can feel like there is much doom and gloom in the news, it is worth taking a step back to gain a little perspective.
For most investors, the accumulation of wealth is a slow process as money is put aside month on month into pensions and ISAs, inheritances are invested or the proceeds of company sales are put to work in the markets.
This multiple-decade journey to a level of wealth that provides choice, freedom and financial security is punctuated by moments of market turmoil that lead to temporary falls in portfolio values.
When accumulating wealth, such falls provide the opportunity to buy equities at lower prices and with higher expected returns. Income from employment provides a sense of security and, for some, surplus cash flow to accelerate contributions to the pot.
Alternatively, options remain for some to retire later or to work part-time.
When workplace income stops, and portfolios take over the role of providing cash flow to fund lifestyles, it is entirely understandable that falls in their values may make some investors feel a little bit uncomfortable.
No one wants to go back to work, curb their plans or – in extremis – risk running out of money.
Suffer losses
It is helpful to remember that, as part of the financial planning process, the financial capacity to suffer losses is modelled to test the suitability of the portfolio chosen to meet a client’s goal with a high degree of confidence.
Regular meetings with advisers also provide updates on how the plan is evolving against its target and the opportunity to talk through any areas of concern and, if necessary, to make informed choices to ensure the plan stays on course.
As part of this analysis, financial planners will be fully aware that investing is a three-steps-forward, one-step-back type of process and will strive to help clients to understand the nature of the journey they face.
However, when markets fall, much of this can be momentarily forgotten. There will be times when portfolio returns are well ahead of inflation and other times when they are not.
Despite all of the bad news, portfolio returns in 2022 are not as bad as some might have imagined, helped by broad diversification and, to some extent, by the weakness of Sterling. Remember, overseas assets are now worth more priced in Sterling terms.
Outcomes in 2022 still sit well within expectation. In fact, a 60% global equity, 40% global bond portfolio could fall by 30% or more and still be within the bounds of expectation.
It is helpful at times like these to remember that the process of spending wealth in retirement is a slow process too, similar to its accumulation.
Imagine that the withdrawal rate from a portfolio is 3% of its starting value per year adjusted for inflation – in other words, £30,000 on an initial £1m invested. A couple of years of returns below inflation, is going to make very little impact on portfolio outcomes over a 20- or 30-year or more retirement horizon.
Calm manner
There should be plenty of years ahead when portfolio returns will be above inflation, although there are no guarantees. Even if there are not, the annual planning process will provide the opportunity to adjust future plans in a calm and informed manner.
Those who have been invested over the past few years will already have accumulated strong growth in the purchasing power of their portfolios, providing a solid financial buffer against times like these.
Investors are well served by measuring the value of their wealth against their long-term plan, not against the latest high-water mark of the markets. Portfolio values are still materially above where they were a couple of years ago, even when measured from pre-Covid levels in 2020.
Recent research from fund managers Dimensional showed that, on average – as ever, no guarantee – returns following market falls tend to be quite strong, historically delivering a cumulative 50% rise in value over the subsequent five years in the US after a 30% fall.
Investing is indeed a slow process that cannot be rushed.
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.
