Knee-jerk reactions to day-to-day market movements are unhelpful at best – and harmful at worst. Talking to an 83-year-old retired entrepreneur recently, I was reminded of the importance of taking the truly long view.
We pride ourselves on being driven by data, not opinions; and the data are increasingly pointing towards the end of an unusual period of smooth and calm markets. Is the long-running 8 year bull market (a period of rising prices) in equities over? The stock markets of the UK, Europe and Japan are starting to look tired. Even the US has shown signs of weakness. Maybe this is just a pause for breath before another march upwards. Whether that’s true or not, we can probably expect greater volatility than what investors have become used to recently.
It is only over the passage of time (years not weeks) that you can start to see – and enjoy – the strong, long term rewards of economic growth and returns on capital. Over the shorter run (one to three years) markets may move against this powerful trend. What really matters is to have well-constructed, diversified portfolios that are strong enough for you to be able to stay invested during the inevitable bad times. We spend our time researching ways to make your portfolios more robust and more likely to meet your target returns in the long run.
What does this mean for you and your portfolios? If the great equity bull market of the past decade is indeed over, does this mean we predict a savage bear market (falling prices) ahead? Should you run for the hills?
The answer to this is an emphatic “No!” and here’s why:
Firstly, your portfolios are well-diversified; indeed, some holdings should actually do well when markets are weak. Any falls in value should not be as severe or as prolonged as those in equity markets.
Secondly, the path to meeting your long term target returns will include periods of volatility and paper losses. How big these will be and when these will happen is impossible to know, but what is crucial is to be mentally prepared to stay the course and not to overreact. These periods are quite normal.
Thirdly, research over several decades shows that buying when assets are cheaper enhances long term returns. By reinvesting income from your portfolio and adding surplus cash at times of weakness, you can benefit from price falls and help to improve your returns over time.
Our message to you is simple:
Be prepared for asset prices to fall in value as well as rise and to become more volatile. This is normal market behaviour (unlike the unusually smooth and calm markets of 2017).
Your portfolios are built to withstand these periods of uncertainty. They should fluctuate in line with agreed risk levels.
Stay invested, reinvest income and add surplus cash during periods of price falls; this is likely to be the best strategy for long term returns.
We continually monitor portfolios and market data; if our analysis signals the need for any changes we will let you know. In the meantime, please feel free to get in touch if you have questions or comments, or if you want any more information.
- FS