There’s no doubt we’re living in unprecedented times.
But when there are political and economic instability and volatility, how should we react when it comes to investments? Particularly when the road ahead is far from clear?
It’s easy to become anxious and lose sight of the long-term benefits of staying invested; however, the best advice is to stay focused and avoid getting swept up in market fluctuations.
The Brexit effect
As the Brexit effect continues and without a clear conclusion, it is not surprising that clients ask about what leaving the European Union means for them and their portfolios.
How are we positioning ourselves for this change? Are the markets going to crash? Should we move all our investments out of the UK, or simply encash the lot immediately?
Brexit is just one example of course, and recent history is littered with other so-called crises, not least of which the credit crunch and banking collapse in 2008. Taking events like these at face value, you could be forgiven for deciding to not invest at all.
And the problem becomes even more complex when you consider the questions of when to sell ahead of a perceived crisis, and — assuming we get that right — when to buy again so you can benefit from the inevitable upturn, when it comes.
Timing these two actions perfectly is nigh on impossible, but the good news is that you don’t need a crystal ball to have a successful investment experience.
The benefit of a financial planner
In reality, long-term investments don’t need to be adjusted constantly when times are challenging.
A huge part of a good financial planner’s role should be educating and reassuring clients — helping them take a long-term perspective on how they view market volatility and look beyond the headlines.
It’s something I sometimes refer to as keeping clients “in their seats”. By this, I mean preventing them from damaging their wealth by trying to second guess what might happen in the world next, tuning out the noise and avoiding knee jerk decisions about their investments.
Or, in the opposite sense, making the most of a benign economic outlook and adjusting their approach to risk accordingly to see the best return.
Putting it bluntly, long-term investments geared towards equities will inevitably go down and up, but this is no more than information on a webpage: it only becomes a loss if encashed when values are down.
A strategic approach to investment
As such, another major part of a financial planner’s role should be a proper lifetime cashflow forecast that accurately identifies what capital will be called on in the next five years, and ring fences this amount in cash deposit accounts.
Only money earmarked for the longer term should be in more volatile investments.
History shows these funds are comfortably capable of producing above-inflation returns – without reacting to what is reported in the news cycle. The trick is to tune out the noise, no matter how difficult this seems at times.
In short, a long-term perspective can change how investors view market volatility, and working with a financial planner helps them set realistic expectations for sound investments for the future.
While the noise continues for the foreseeable future, this short video from Dimensional Fund Advisors, is an eloquent reminder on how the support of a financial planner can help you tune out the noise.