Due to the current climate, I have spoken to several individuals over the last few weeks regarding market volatility. These conversations have ranged from clients simply wanting a chat or needing a financial "hug", to more panicked questions of whether they should be selling into cash and reinvesting when markets have improved. It is this latter theme that I want to focus on in this blog.
February to March was a particularly difficult period for global markets and, in what felt like a matter of days, most pension and investment portfolios were showing heavy "losses". It is important to remember that these are only "paper" losses - which are not real losses unless you sell. Still, they are far more significant psychological hurdles to overcome than the positive effects of growth.
I liken it to a long hike, we all prefer the steady climb up the mountain, stopping to enjoy the views, but are less comfortable with a sharp and unexpected descent; this is human nature, and some of us are better at dealing with this than others. If you look at the rally since the low point in March, much of these paper losses have been clawed back. Still, these would have been missed by those investors who had sold into cash as markets were falling – and probably did not reinvest as they had planned to because inertia can be a dangerous trait.
Whatever you may hear from those nearly-fund managers and investment professionals that you meet "down the pub", you cannot time markets with any consistency; luck should not be confused with skill. Instead, it is time IN the markets that should result in a better outcome more often than not.
It remains the fact that you only actually lose money when investments are sold, and this decision would nearly always be underpinned by cash requirements. If you do not need access to your finances, there should be no reason to sell during a time of market weakness. A pension is a good example of an investment that is effectively illiquid until age 55.
In conclusion, staying the course is vital when it comes to investing. Although the journey may contain twists, turns and potholes (for UK investors), if you focus on the destination, i.e. the outcome, you will avoid making emotionally charged and panicked decisions along the way. Building a relationship with a financial planner can introduce invaluable financial coaching, with important choices being made free from emotion, and with a long-term focus on the outcome.
If you would like to discuss financial planning in more detail, please do not hesitate to contact me.
The value of investments may go down as well as up.