The backdrop
We are all well aware by now of the investment impacts of the war in Ukraine, post-pandemic supply chain disruption, and surging energy prices – all fuelling heated inflation. These scenarios may not materially improve in the short term.
Yet despite these hurdles, the outlook for the global economy may be better than it looks, as our chief economic strategist, Gerard Lyons, outlined at our recent Wealth Management Summit (watch on demand for free) in collaboration with The Times and Sunday Times.
He said: “We’re moving away from an era of cheap money that has caused a lot of problems (it has led to asset price inflation, and to inefficient companies staying in business), and getting back to a more normalised environment. Once we have adjusted, it will make for sounder investment decisions.”
So the outlook for investors will get better, but it may not happen as soon as we would wish.
We tend to focus on the negative
On top of the troubling financial news, there is little relief in wider reportage: wars and cross-border tensions, cultural and political divisions, natural disasters and man-made mishaps – these all amplify our anxiety and constrain our ability to make the right choices for our money.
Evolution has programmed us to focus on the negative. As this BBC article explains, we have evolved to tune in more to events and circumstances that may pose a threat. Anticipating the potential pitfalls to a situation can help to prepare us, but this effort can also overwhelm us.
Negativity bias is widespread and just one of a potent mix of biases that impair our decision-making ability. Countering these biases is never straightforward. But knowing they have such a hold over us may help to put events into perspective and act with more conviction.
So what can you do?
We often talk about four key factors you can and should control when investing, and to model for factors you can’t, such as inflation and market performance. Critically relevant now is the factor of staying invested, however challenging it may feel.
Numerous studies show how damaging it can be for investors who try and move in and out of markets – selling assets when news is bad and then attempting to gauge when markets have hit rock bottom, and buying back in. This strategy rarely works out.
Bloomberg recently gathered a compendium of recent charts and statistics to highlight the case against trying to time the market. Often the best periods followed a harsh decline – but these are almost impossible to predict.
Among their findings they show that from January 1980 to June 2022, investors who missed the best 5, 10, 30 and 50 days by investing in the S&P 500 had returns that were, respectively, 38%, 55%, 84% and 93% lower than those who stayed invested.
Putting numbers on that thesis: a hypothetical $10,000 would be worth $1,060,000 over that timeframe if the sum remained invested. Even missing the best five days in that period would result in a shortfall of over $400,000. Missing 50 days and an investor would have a portfolio worth only $75,568.
Of course, these are US figures, but the point holds true for UK and global investors: you will likely miss out substantially if you try and time the market.
Cash savings are not the answer
Keeping your money (or seeking refuge) in a savings account or similar is not the answer. While we recommend isolating money you plan to use in the next three years from the markets – in cash or cash-like instruments – this shouldn’t be a long-term strategy for the bulk of your funds. Especially now, with cash returns being paltry, and inflation taking hungry chunks out of your pot.
The fact is, investment markets are typically positive – soundly outpacing inflation – over the long term. As a broad indicator of global investing growth, the MSCI World Index has delivered annualised returns in the 10 years to the end of September 2022 of 8.69% gross. Even including the chaotic declines of the great financial crash and the pandemic, the index has produced 10 positive years vs four negative years since 2008.
So being globally invested and diversified for the long term, while being mindful of any needs for cash in the shorter term, is undeniably a better option for many individuals – including those in retirement. If you believe the market disruption will persist you can choose to drip feed money into the market – buying assets consistently and hoping to benefit from a lower price – but this may not be a suitable strategy over a longer timeframe.
Of course, everyone’s situation is different, so do get in touch if you want to talk to us about your specific circumstances.
Managing uncertainty
Market commentators talk about the current environment lacking precedents. This isn’t new. Similar decrees emerged during the dotcom crash, the great financial crisis, the pandemic… all in the last 20 years or so. Perhaps we should accept that as investors – in a complex, interconnected ecosystem – there will be frequent unprecedented events and much more uncertainty.
That doesn’t mean we should ignore the imperative to protect and grow our wealth.
We should accept we have a natural bias towards consuming gloomier news, but it’s key not to get overwhelmed by pessimism. Or the next round of adverse events.
At Netwealth our experienced team can help you to overcome the emotions which can derail our judgement. Please get in touch, without any obligation, and we’ll show you what we can do to help.
Please note, the value of your investments can go down as well as up.
