By Chartered Financial Planner Ryan Steward FPFS CII.
During times of economic uncertainty, it’s important to understand the role of a financial adviser and why making knee-jerk changes to how your pensions and investments are managed isn’t necessarily the right thing to do.
1. What “market turmoil” means, in simple terms
Market volatility very simply refers to how much a market is moving around compared to the average Volatility is traditionally thought of as a type of risk, the more volatile an investment is then generally speaking the more risky it is
2. How this can affect investments/pensions etc + – Long-term vs short term performance
Right now, in early 2022, Investors are perhaps looking at their pensions and investments, and seeing that their values are falling.
What makes good investment strategy stand out from from the rest is the reaction to market volatility and falling values. Investor psychology is the key to this difference The two key psychologic traits of successful investment strategy are: discipline and patience Panic reactions and tinkering with or selling investments due to a market reaction during volatility and downturns are not behaviours synonymous with good investment practice. Meanwhile prudent investors are often seen to employ patience and discipline and will understand that volatility and downturns are a normal and expected part of investing over the long term
3. What history teaches us about time in the market vs timing the market
Using the S&P500 as a barometer, there’s only been 4 occasions in the last 100 years where markets have fallen for two or more consecutive years and while buying low and selling high may sound great, research tells us that trying to time the market can be a costly endeavour This chart from JP Morgan highlights the impact of missing just the best 10 days of the stock market over a 20-year period resulted in a final portfolio worth over 50% less than someone that remained fully invested throughout Further research highlights that the best days in markets often come close to the worst days. Incredibly, over a 20-year period 70% of the best 10 days for markets happened within two weeks of the worst 10 days. Data also tells us that the longer someone remains invested then the lower the risk of that person losing money becomes
4. Why having a financial adviser is important during times of market instability
Humans are naturally risk-averse and volatility can be unsettling to some, however a good financial adviser is there to help educate that investing is not a straight line journey, and there will be years where investments have gone down, but focusing on the long-term trend is key A good adviser will have you setup according to your attitude to risk and explore diversifying your holdings into a variety of different asset classes, which can help smooth investment returns over time by not having all your eggs in one basket
