Worried about your investments in the current market?
Since the start of 2022, the UK and global economy has come under significant pressure from high inflation which reached 10.1% in the UK for September 2022 driven mainly by rising global energy costs: a genuine cost-of-living crisis.?Although inflation effects are felt by all in the country, it has severely affected purchasing power of low-income households.
Of course these recent events form part of the story of 2022, with the onset of the war in Ukraine at the start of the year bringing to the fore these inflationary issues and uncertainty that will always bring downward volatility to the markets.
Volatility is natural in the markets and is always to be expected, it is part of the way in which they function, and they often provide the opportunities for investors that drive markets forward once things settle down. It’s understandable that it also brings anxiety to investors, as we are humans after all, where fear or greed can easily overtake logic in unexpected times.
How do financial markets work?
We thought this would be an ideal time to highlight some of the factors that are the general principles of holding investments which have held true over many years and through a broad range of worrying world events.
Investments are for the long-term and should not be viewed in just a very short period of time because they do and will always go up and down, which is their nature.
Investors will endure many downturns over their lifetimes. History shows that larger downturns are uncommon and temporary. Bear markets (extreme downturns) are on average shorter than their opposite, bull markets (periods of positive growth), and have had far less of an effect on long-term portfolio performance, as the chart below shows.
Recessions and stock markets don’t move in tandem. Although the onset of recession has often led to sharp falls in share prices, stock markets have tended to fall well in advance of the actual recession. Markets have tended to recover quickly too – usually before recessions are over. Financial markets are quick to price in events. The economic data takes longer to come through.
These events and downturns are expected – but there is no crystal ball to say when they would happen in the short term as investors cannot see unexpected events such as the Ukraine conflict. That is why investing should be given a long-term view.
Why is investing for the long-term?
Staying invested over the long-term diminishes the chances of a negative return. Making hasty decisions in a downturn can result in expensive errors. For example, if an investor were to sell out of their investment in a downturn, they would realise the market loss and fail to benefit from the subsequent market recovery. It’s best to tune out the day-to-day market noise and stay the course.?Below you will see a graph which illustrates in monetary terms how missing the best days in the markets have an effect on investments.
Financial markets hate uncertainty, often resulting in overreactions until more information becomes available. This is partly why the best and worst trading days often happen close together. Trying to time the market can be futile. These economic and market woes might tempt some investors to withdraw from markets and go to cash, but that would be almost ensuring a negative return when taking into account the corrosive effects of inflation. As the chart below illustrates, the chances of a negative real return are much lower for shares and bonds compared with cash, particularly as the holding period gets longer. The below chart shows cash as pink with average interest rates for a 90-day notice account, against CPI and RPI Inflation rates, and the sector average performance of the AFI Aggressive Fund sector since 2004.
Past performance is no guarantee of future results.
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The below chart shows the average performance of the Mixed Investment 40-85% Fund sector against RPI and CPI Inflation which goes back longer to 1990.
Past performance is no guarantee of future results.
Historically, world events have had effects on the markets, but over time growth outweighs the downturns.?It is an unsettling time for investors, but these falls in value are not a result of companies going bust, it is a result of the markets falling due to sentiment and uncertainty as they do when world events dictate.
What is diversification?
Diversification in investment terms, means to bring together a range of different asset types and geographies into one place, an investment Portfolio.?This is one of the main principles in investment philosophy, and has been a proven tactic throughout history.?Inevitably markets do react to unexpected world events and issues, but then work themselves out and get back to fundamentals and recover.
Across the board, it’s a challenging time for each asset class which is why performance is so choppy across all risk profiles.
How does this affect your financial plans?
It’s painful to experience bouts of volatility like this, and it impacts all investors.?But short-term risk is the necessary flipside of long-term returns. Whilst it may be tempting to “dash for cash”, an investor in sterling cash would have “invisibly” lost 10% this year in purchasing power, and has lost almost 20% in international purchasing power (relative to the dollar).?So, cash, particularly sterling, is risky too if being held for the medium to long-term.?Anyone who lived through the 1970s inflation era knows how rapidly cash can lose its value.
What should you do?
If you are concerned about your investments then the best thing you can do is have a review with your financial adviser or planner.?Below are some general points to consider.
If you need some help with your investments, PenLife are Chartered Financial Planners, and we would be happy to have an initial discussion with you to see if we can help.?Please?get in touch.