Following a sustained run of positive returns across equity markets (arguably 9 years), last week saw a return of the ‘V’ word. Volatility has always and always will be with us, and as long as markets exist there can be no returns over and above the risk-free rate (call this the returns from cash deposits) without risk. This is what markets do; as sure as night follows day.
We know all of our clients are pretty well versed in our philosophy that says ‘ignore the noise, keep calm and carry on’, which is evidenced by the fact that no-one called when the recent market wobble occurred. However, now and again it’s worth revisiting the fundamentals of evidence based investing to help rationalise any fears and ensure the focus remains on long term returns and the disciplines needed to obtain them.
Broadly, there are two ways of investing. You can speculate, try and time the market (choose the correct time to ‘get in’ and ‘get out’ and pick the winners and losers) and spend a fortune in fees trying to beat ‘the market’. This method involves the ability to forecast and as the renowned economist John Kenneth Galbraith once remarked ‘there are two kinds of forecaster: those who don’t know and those who don’t know they don’t know’.
Or you can base your investing on decades of academic evidence as to how markets work, keep your costs to a minimum, get in the seat and enjoy the ride, smiling smugly when all around are losing their heads, knowing that over time capital markets produce returns. But, and here’s the thing, you can’t win if you’re not in the game and once you’re in it you need to be hugely diversified across thousands of assets, across different asset classes and then, stay seated and never be tempted to drive off course by greed or fear.
All this is in the context of your financial plan. We know the returns you need in order to achieve what you want to achieve in life and we know the expected returns from our portfolios. It is therefore only a case of controlling the things we can control and not worrying about the things we cannot.
The things we can control are cost, diversification and discipline. We can keep the fees down by using institutional asset class funds, wrapped inside a single platform. We can maintain diversification by buying funds across global equity, bond and property markets and making sure you hold thousands of assets in line with your attitude to, and tolerance of, risk. Risk and return are related but, whether a more aggressive or a cautious investor, it is time in the market not timing the market that gets you the results.
The final part of the equation, discipline, is down to both of us. We can bang the drum about remaining invested throughout all periods of volatility and how costs and diversification are the recipes for investment success (and therefore for living a life without money worries) but we need your help in keeping your part of the bargain. By all means, be interested in what is happening out there in the world and feel free to have your say on Brexit, China, Russians, Donald Trump, Capitalism or whatever is the hot topic of the day, but don’t let any of this ‘noise’ knock you off course.
Financial Planner & Director