It’s been a difficult few weeks. Between see-sawing markets and concerned clients, it’s clear we’re dealing with a changed world and one in which financial advice has a new sense of urgency for many.
While there’s no way of knowing how long the uncertainty will last, we do know these dynamics will continue to test and challenge us.
For now, navigating daily uncertainty is the new normal. Many industries have been hit hard by containment efforts related to COVID-19 and it’s hard not to be affected by what sometimes feels like wall-to-wall bad news. But there are many reasons to stay positive.
The emotional side if investing is commonly felt by a client as a sense of financial well-being or peace-of-mind. How does ‘peace-of-mind’ look today in an environment when each way moves in the market are a daily occurrence, and volatility is a given.
Peace-of-mind is sticking to the ‘plan’
Key advice: Abandoning the plan can be costly. An investment plan established during calmer times should not be ditched in periods of volatility.
Having a solid plan for how to tackle volatile markets is key. The decision to “stay the course” is a simple but powerful investment plan for times such as these. It asks us to put our emotions to the side and use discipline and perspective instead.
There are three useful messages around the value of “staying the course” in turbulent times:
- Abandoning the plan can be costly
Key advice: During a downturn, some investors mistakenly believe that converting to cash will give a better long-term result. Evidence shows that such action potentially blocks you from enjoying the strong recoveries that have historically followed market downturns.
History has proven that in volatile markets often the best move for investors is often no move at all. Downturns are a market occurrence that vary in length and severity, but history bears out that staying invested despite the short-term pain has served investors well in the past.
For instance, those that stayed invested through the global financial crisis and recession of 2008-09 and beyond were able to capture the upside from one of the longest stock market recoveries in US history.
- Any changes should be made because of changes in your life, not changes in the markets.
Key advice: Remember the rationale for your original asset allocation.
During a downturn it’s also worth remembering one’s original plan and the rationale of decisions made as part of a long-term plan.
Asset allocation decisions reflect goals. If those goals are sound and matched to your risk tolerance, and – furthermore – are focussed on those things within your control (asset allocation and costs), there is every reason to stick with a plan and long-term goals.
- Keep market swings in perspective. It is almost certain that there will be volatility ahead
Key advice: Volatility is a given, but you can navigate uncertainty by focusing on those things within your control (asset allocation and costs.)
Global equity markets have experienced eight bear markets over the last 40 years, or one roughly every five years.
Although huge daily swings are enough to make anyone nervous it remains the case that investors will typically experience many market downturns over the course of their lifetime.
At times like these it’s more important than ever to help keep emotional reactions in check and be reminded of the value of those investment plans you have made. By focusing on those factors within your control you can minimise the risk of making a knee-jerk decision that will cost you in the long run.
To summarise: stick with a plan
During moments of upheaval such as these, the value of solid financial advice is felt more keenly than ever.
As a Financial Adviser it is our responsibility to help you separate emotion from strategy and find some peace-of-mind amidst all the daily uncertainty.
No one can predict just how disruptive the COVID-19 pandemic will ultimately be in coming months, but it is a good time to remind that careful consideration went into investment plans and the power of sticking with those plans.