What’s all this about Investment Behaviours?
It’s not an easy ride for investors today, when you consider some of the actual and potential headwinds facing you,
- GDP down 6% in Ireland in Quarter 2 2020
- A market fall of >30% earlier this year
- Negative interest rates on offer in the Irish banks
- Brexit – will there be a deal?
- US presidential elections – what will happen there?
Any one of these on their own would appear like a big deal. But all of them within one year – wow!
It can be difficult to remain calm with all this swirling around. But that is exactly what’s needed here – to remain calm. And it’s our job to help you do that. We’ve seen these situations before, where the sense of needing to take action, even any action at all seems to be right course. But it’s not, instead it’s important to follow the well-worn path of staying focused on your plan. Here are a few thoughts to help you to stay committed to that plan.
Remember your time horizon
Short-term volatility is just that, short-term. Your investment time horizon will typically be more than 10 years, maybe 40 or 50 years if you are looking at your pre and post retirement timeframe. A blip in the market is just that. The S&P500 fell 34% between 19th February and 23rd March this year. However, by the start of September, it was back to 5% up on its previous peak of 19th February! Lots of people panicked and bailed out of the markets at the end of March, and missed the rebound. Thankfully our clients didn’t, you stayed focused on your plan and your long investment time horizon.
Focus on what you can control
All of the headwinds mentioned at the top of this piece are outside of your control. But what you can control is having clarity of your goals, your timeframes and your willingness to accept risk. With our help, you can then build a plan and a financial portfolio to help you achieve your objectives. Focus on these things within your control, get them right in order to achieve your objectives. The other factors are unhelpful noise. And then together we’ll regularly review your plan and your portfolio to ensure it continues to meet your needs.
Aiming for higher returns increases volatility (this is not a bad thing)
When you are investing over a long timeframe, investors are often willing to take more risk with the aim of achieving higher returns. In this scenario, your carefully crafted investment portfolio will likely contain more risk assets such as equities. This will in turn increase the short-term volatility of returns. This is not a bad thing; volatility is simply an expected feature of higher risk asset classes. As an investor, you need to expect volatility and be comfortable with it. Otherwise, you should consider reducing the risk within your portfolio, and also your likelihood of achieving higher returns.
Of course we would all love to achieve double digit positive returns every year. But this is simply unrealistic, certainly without taking extreme levels of risk, which in turn increase the potential for significant downwards swings. Don’t build your plan around unrealistic and unachievable expectations. Instead build a plan that can be realistically achieved over the longer term in usual market conditions, with all their highs and lows. Then review the plan regularly to ensure it remains the most realistic way of achieving your goals.
Leave emotions at the door
As probably the world’s greatest investor Warren Buffett once said, “Be fearful when others are greedy, be greedy when others are fearful”. The point he is making is that markets are often driven to extreme levels by irrational exuberance. This is demonstrated by people piling in and buying as markets soar upwards (greed), and by people selling out of markets that have fallen sharply (fear).
Of course Buffett was noting the contrarian opportunities. Instead of succumbing to the emotions of greed or fear, people should only consider selling when markets have had a good run and are now expensive, or buying in when markets have fallen and now are cheap.
Yes, the investment world is a little uncertain at the moment. But the sun will rise tomorrow and the day after. Stick to your long-term plan and increase your chances of achieving your goals.