Given the recent volatility in stock markets I thought it timely to write to you about a number of things fundamental to investing.
Given the recent volatility in stock markets I thought it timely to write about a number of things fundamental to investing. Some commentators have attributed the recent market selloff and return of volatility to the market to a risk of the return of inflation. They suggest that Central Banks will begin to tighten monetary policy faster than previously anticipated in order to control inflation, therefore hampering a rally in stocks. However at this stage there does not seem to be enough compelling evidence to suggest that inflation is roaring back. See graph below. Central banks have previously indicated that they will ease off the accelerator, but that this will be gradual and therefore Central Bank policy should remain supportive of risk assets over the coming year. Naturally there are risks and unknowns, but these are ever present when investing in pursuit of real returns.
The reaction of the media to the return of volatility to markets needs to be addressed. Newspaper headlines such as ‘Trillions wiped off pensions’ are designed to instil fear and worry in savers and investors…. and fear sells newspapers. Fear does not make for good long term investing results.
Investing is a bit like planting a tree. Once you have decided on the type of tree that is best suited to your garden, you plant it so that at some stage in the future it will bear fruit / bring you happiness and shade. Similarly you invest so that at some stage in the future you will reap a return which will make your financial life easier. When you plant the tree it roots and grows due to the force of nature. It doesn’t grow at a steady or continuous pace. There are times it springs ahead, and times it doesn’t. You don’t have to do too much with it. You don’t dig it up every 60 days to check on its progress. You don’t uproot the tree and store it in a safe place over the winter to protect it from ‘bad weather’. It may lose its leaves, or stop growing for a time, but it generally recovers and continues to grow.
One of the biggest determinants of how your pension / investment plan will perform is your own investor behaviour. If you are constantly switching or altering investment funds depending on which headlines appear in the media, and then selling in revulsion once there has been a dip or fall in the stock market, then it is very likely that your investment plan will not bear fruit.
Investors who feel that their financial fate is a hostage to the vagaries of global economics, or impersonal and often volatile market forces, or personalities of fund managers who they don’t know, tend to see themselves as pawns or victims. But investors who realise that their own behaviour is a decisive variable in their long term results feel – because they are – very much in control of their own destinies.
Furthermore, regular investors with a reasonable investment time horizon should welcome the return of volatility to the market. By investing on regular basis into your plan, you are buying into the market at regular intervals, regardless of its level. All that steady euro cost averaging, year after year, means that you are never buying a big stake at a market high (or, it is true, a market low) It should be remembered that in a bear market (ie when shares are falling), profits are made, although few see it at the time.
Whether markets go up or down in the short term is likely to be insignificant, investing is for the long term and investment plans should reflect this.
My last graph is a reminder about investing in equities….
If you have any questions or feel I can help in any way please get in touch.
Gavin Gilmore QFA FLIA CFP TEP CTA