By virtue of necessity, the media works on a day-to-day horizon when covering financial markets. For most investors, though, the more important horizon is measured in a matter of years.
Referendums like “Brexit”, elections and geopolitical events can look momentous if you assess them via the short-term market/media reaction. I won’t pretend that I have a crystal ball and can predict what will happen in the coming days, weeks or months in respect to the Brexit outcome. In fact I would suggest that anyone who says they know what will happen in the short term should be treated with suspicion. But taking a step back from the noise can also provide a much needed perspective.
The impulse when the stock market abruptly plunges is to do something. Anything! Our life savings are often on the line, after all.
But that’s just the thing: Stocks are most useful for long-term goals. So unless those goals have changed in the last day or two (and they may well have for some people who live and work in Europe), it probably doesn’t make much sense to overhaul an investment strategy based on a blip of market activity.
So during these volatile times I ask you to consider the following points, many of which I’ve discussed with you in our past meetings together.
1. You are not just in the stock market.
Your portfolio and net worth consist of a diverse mix of assets. Your portfolio is spread across a range of different asset types including cash, bonds, property as well as shares both here and overseas – (most of our clients portfolio’s are spread across 10,000+ different investments). If you have a home in Australia, its value hasn’t fallen this week and some bond and commodity investments have actually risen. Interestingly, as I write this letter the share markets both here and overseas are up by more than one percent.
2. If you have been investing in a diversified global portfolio of stocks in the last seven years, you are most likely a winner.
It’s generally a bad idea to look at your investment statements too often, but take a quick peek.
That gain you see is one reason you are in stocks in the first place. Plenty of research shows that if you miss just a few days of the market’s biggest gains, your long-term portfolio will suffer badly. If you decide to put a bunch of your money in cash in the next few days, how will you know when to get back in the market? You’ll probably be looking for a sign, and that sign will be the very rebound days that you will have missed out on.
3. At some time in the past, when we were not having to deal with an event like Brexit, you made a decision to construct your portfolio a certain way.
You knew that stocks involved risk and that the returns they have traditionally delivered, above and beyond what cash and bonds do, was the reward for your persistence.
Nothing about the vote for Britain to leave the European Union suggests that the fundamentals of capitalism have changed. So neither should your confidence in very long-term ownership of the pieces of the for-profit companies that benefit from your fortitude.
4. Long-term investors have time to recover.
I have heard of way too many 70-year-olds who sold all of their stocks in 2009 (during the GFC) and are healthy enough to live to 100. They’d be going on a lot more holidays now and be worrying less about long-term care if they had held firm. My point here is that most of my clients have long term time horizons for their investment needs. And, in order to maintain their lifestyles and the longevity of their money they need to invest part of their assets in investments that provide some measure of growth over and above the cash and inflation rates.
5. Not everyone can handle the stress of investing in stocks.
You can’t say that nobody told you there’d be days like these. Strange days indeed come with the program. There will be surprises always, often when most talking heads thought something else would happen.
So try to give the situation in Europe some time to work itself out, and consider the alternatives. There are few investments that can deliver the kinds of returns that stocks can without their own accompanying anxiety and uncertainty.
Another alternative is to save a lot more in safer investments like cash or certain bonds. Most people don’t have enough income to do that easily, so settling for lower returns will mean a combination of working longer and living modestly. That was not the plan.
6. Beware of predictions.
In the past few days I have been bombarded with supposed insights from financial and economic “experts” of various sorts. Often a lot of it contradictory. But it’s all speculation!
No one knows what happens next and I’m not writing to you to profess that I have all the answers. But what I do know is that in the past 30 years that I have been in this profession I have seen my fair share of doom and gloom predictions. A few of these have proven correct but the vast majority have proven to be grossly inaccurate. It is important to remember that even the periods of economic instability and upheaval do not last forever and ultimately better times return.
7. Consider the optimistic outlook.
There was a recent article written by Peter Eavis that examined the possible fallout in the markets. He noted that it is entirely possible that Britain and Europe will come to an amicable split and that no other country will see fit to leave the European Union after all.
The unintended consequences in Britain might also be bad enough to scare off voters elsewhere.
8. This is what markets do.
Again, there is absolutely nothing abnormal about what is going on here. The premium (or the better return) we expect to get from investing in growth assets such as stocks when compared to cash comes at a price. This price comes in the form of periods of short term uncertainty and volatility.
Most of us have to save somewhere, and history suggests that stocks are the most accessible route to get the returns you’ll need to retire or to achieve your lifestyle goals. It would take decades of systemic economic and political erosion to prove otherwise, and a day or two of market declines do not suggest that anything like that is upon us.
We will continue to monitor what is going on closely but if you would like to discuss this topic in further detail please do not hesitate to contact me.