2018 was the worst year for financial markets for a decade. Many fear that 2019 will herald more bad news. “Everybody is terrified that this is the start of a global slump,” one participant told The Times recently. “Terrified”? Really? Unless he or she was actually being chased by a bear , I think “terrified” is probably overstating things.
Instead, for long-term investors and especially entrepreneurs still building their wealth, it is more constructive to think of recent market movements as SALES: the opportunity to buy things that you want to own at below full price. And these are not TVs or clothes that will wear out and be recycled one day. No: I am talking about assets that will work for you while you sleep; assets that are likely to grow in value, not waste away; assets that will deliver you a share of the restless ingenuity and innovation of thousands of other businesses around the world. You can now buy more of these assets at a lower price, boosting future returns from your long-term portfolios. What’s not to like? Staying on course Like being on a ship in choppy waters, every lurch in markets can be unsettling; after a while you might even fear going under. However, a well-constructed portfolio should never result in you actually bailing out just because the ride is too uncomfortable. The journey is as important as the target return and quality advice will take this fully into account. I am a long way from “terrified”, whether on behalf of my clients or myself. In fact, I am relaxed. Why? Because as I wrote in a letter to clients back in Q1: “Be prepared for asset prices to fall in value as well as rise and to become more volatile. This is normal market behaviour… 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.” Market volatility is normal and an essential part of the journey to long-term returns. When we build portfolios, trying to understand the likely extent and duration of fluctuations and what a client can comfortably withstand is a critical part of the process. A notional long-term target return is meaningless if the client bails out along the way. Taking my own advice I am adding as much surplus cash as I can spare to my long term portfolios. Cheaper prices have increased my expected return and my portfolio is constructed so that I have a reasonable idea of how it will behave in different scenarios; in the words of my favourite Radiohead song, no alarms and no surprises. - FS