Keep Calm and Carry On
So we’re out. As I write this first thing, the doom mongers and naysayers seem to be right, with the FTSE 100 down 500 points and the pound at a low not seen since 1985. September 11th 2001. September 15th 2008. Do we now add 24th June 2016 to the list of black days for the stock market? Should we be worried? To answer this we need to go back to the fundamentals of our financial planning and investment philosophies.
All our financial plans are built on a series of assumptions that take account of possible significant reductions in market values through stress testing and the calculation of your “capacity for loss” (the amount of money your plan can afford to lose before it fails). So what impact has the Brexit vote had on your portfolio so far? The answer so far is not that much, due to the fact that not all of your assets are invested in equity (stock market) investments. The approximate percentage of equity assets held in four examples of our portfolio is set out below:-
If we assume that all global markets have fallen by 10% (which they haven’t to date) then the impact on your portfolios will be as follows:-
Cautious 2% loss
Prudent 4% loss
Balanced 6% loss
Aggressive 8% loss
To put this in to some kind of context, in 2008/9 from peak to trough the markets fell by nearly 40% which led to temporary losses of 11% on the Prudent Portfolio, 22% on the Balanced Portfolio and 33% on the Aggressive Portfolio. However all these losses were recovered less than 6 months later because you all remained fully invested throughout the investment period. There was no panic, no attempts to “forecast” and “market time” to either prevent losses or make gains beyond the market. As a result no clients’ financial plan failed or was thrown off course. You stayed disciplined.
From a financial planning perspective our role is to try and bring the greatest degree of certainty to your affairs; as much as is possible in an uncertain world. To achieve this we use discussion, research, cash flow forecasting and the periodic reviewing of your financial plans. We aim to control what we can control and not to worry about what we can’t. For example, we can’t control the markets but we can control what we spend. One of the reasons you all pay us is to prevent you from taking action that may damage your long term plans, and in this vein we do not let the excitable hyperbole and noise generated by the broadcast and written media be our guide for how we should invest your money. Instead we rely on proven academic evidence, discipline and a philosophy that we know works in the long term.
The infographic below courtesy of Bloomberg is a good example of missing out by trying to time the market. In this case it’s the FTSE 100, but the principle stands in other indices.
It is quite possible that Brexit may have a long term impact on your position but we do not know whether this impact will be positive or negative. However what we will not do is panic or engage in an attempt to forecast the future and make bets with your money based on that speculation.
In simple terms, given the years of academic empirical evidence, we keep calm and carry on.