Wait for the returns
Long-term goals, short-term emotions. George Uglow looks at the tension which often exists between investor goals and market movements.
There is always a dynamic tension that exists between the sensible, well thought-out, long-term financial goals that investors set in place – often with the help of their financial adviser – and the emotions that they are likely to experience in the moment, as markets respond to new information and portfolio values are impacted.
This tension can sometimes be most acutely felt by both the investor and their adviser in the early stages of their relationship when a portfolio either goes down or sideways in the first year or so.
However, as much as one would like to start one’s investing experience with markets rising, the reality is obviously not always the case, as newer investors have recently experienced.
Feel unsettling
From the investor’s point of view, an aversion to loss, the feeling of loss of control and disappointment at seeing hard-earned money falling in value can feel unsettling.
From the adviser’s perspective, it can also be a challenging time, knowing that, however sound the financial plan, however sensible the portfolio asset allocation and however much time they have spent providing insight into the up-and-down journey a client will experience, emotions often trump logic when a portfolio shows a fall in value.
At such times, it can be useful to reflect on several things:
1Cash is the only investment that avoids losses, but only before inflation.
And cash’s low, long-term, after-inflation returns are unlikely to allow most investors to meet their financial goals, hence the need to add equities and bonds into the asset allocation.
Cash does play an important part in a well-constructed financial plan, especially for liquidity, contingency and short-term goals.But when considering the longer term, keep your faith in the markets.
Do not be fooled by today’s high cash interest rates relative to recent years.They are a chimera for long-term investors and are not a substitute for a sensibly structured long-term portfolio designed to meet long-term goals.
2It is the very uncertainty of the shorter-term outcomes of equities and bonds that delivers the longer-term, higher after-inflation returns that most investors need to meet these goals.
The longer-term expected returns from a sensibly structured investment portfolio are far higher than those of cash.
3Returns come from markets, not advisers, at least those employing a systematic approach to investing that aims to capture market returns.
Blame should not be apportioned to an adviser because a portfolio has not gone up in value in the same way that praise should not be heaped on them if it has risen spectacularly. Markets are not predictable in the short term.
4Falls in portfolio values are not losses and, while there are no guarantees, have every likelihood of recovering in time.
Patience allows the longer-term expected returns to be realised. Avoid emotionally driven investment decisions that might impact these longer returns.
If we look at historic data depicting the likelihood of gains in purchasing power over the last 30 years, we gain a useful insight into the proportion of times that investors in a 60% equity, 40% balanced portfolio have suffered falls in value over different time horizons.
While falls in purchasing power – that is to say, after inflation – and even nominal value over two years are common, over five years – which is only a fraction of the time horizon of most investors – the chances of a fall decreases materially.
If you are a new investor, keep the faith and remain invested for the long term, because that is what is required to give yourself a chance of meeting your long-term goals.
If you have been investing for some time and been through one or more cycles of market falls and recoveries, hopefully the tension between longer-term goals and short-term emotions will be greatly tempered.
As Charlie Munger, vice-chairman of US holding company Berkshire Hathaway, once said: ‘The big money is . . . in the waiting’.
George Uglow (right) is a chartered financial planner with 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.
