Yesterday saw global markets fall at a rate not seen for almost a decade. Oil price wars and Coronavirus made for a bleak start to the week.
For many, it’s a worrying situation which isn’t helped by the daily, if not hourly, exasperated media coverage – which has led to supermarket shelves being cleared of paracetamol, pasta and has literally had people fighting over the last roll of toilet paper. I even read that a gentleman in West Wales had closed his business and was self-isolating until ‘threat’ of Coronavirus was behind us.[i] We live in extraordinary times.
As Financial Advisers, there are several factors we consider and employ throughout the planning process which not only incorporate recession-like market movements, but also help to educate our clients not to panic in times of volatility.
The first of which is an understanding of behavioural finance and emotional behaviour, whereby many people incorrectly assume best and worst opportunities to invest funds. This could be delaying investment despite long term goals or looking to pull out of investments and move to a cash position. A good example of how detrimental this could be is illustrated by considering annualised returns of the S&P 500 index over a 20-year period. If you missed the 10 best days in the market your returns would have been 2.01% or -0.33% for the best 20 days. If you had remained fully invested throughout, which included two recessions, your returns would be 5.62%[ii]. Quite simply, we never try to time the markets and for those with the correct investment horizon, more focus should be on time spent in the markets.
We must also consider asset allocation and equity exposure. You will note that the media will cover major benchmarks such as the FTSE 100, a composite of the top 100 companies in the UK. Saudi Arabia caught investors by surprise, slashing the cost of oil by increasing production. The oil heavy FTSE 100 took the lead in the sell off and other indices followed.
To note however, a well-diversified portfolio of mixed asset classes such as cash, fixed interest & property will help manage the overall risk and volatility of your investments. It is important to regularly review your portfolio to ensure you remain within a risk and volatility bracket you are comfortable with, as well as making changes to reflect how the market is positioned, as well as future expectations.[iii]
One of the most useful tools used to mitigate unknowns is cash flow planning. This allows for us to map out a projected journey and within this we can roughly calculate if a client is on track to achieve goals such as a certain retirement income at their chosen retirement age, or if they’re likely to run out of money during retirement and should be saving more. We also build in market simulations at critical times, such as hypothetically recreating the events of the 2008 recession to show what effect this might have on income and savings over time. Put simply, if we’re able to demonstrate your funds are okay over the long term, you shouldn’t panic in the short term.
So where to next? It is likely that volatility will continue for the shorter term, a month or so has been projected by many of the fund managers we have regular contact with. Yet, each is united in the common opinion that the current market sell off has been driven by confusion and uncertainty, rather than any fundamental change in circumstances.
In a FE investment market note yesterday, they quoted that “The market selloff has been rapid, but also sentiment driven. The recovery could be equally as rapid when the current crisis passes. We will be focused not on short term market movements, but signs of knock on events that change the long term picture.”
If you are unsure how your investments have fared due to recent volatility or what effect it has had on your financial goals, Moorland Mayfair are offering a complimentary health check that many have found extremely useful, simply contact us by phone on 01633 415353 or email using [email protected] and we’ll explain the process in plenty of detail.