The legendary US investor Warren Buffet, whom General Electric’s former CEO Jack Welch called “the smartest guy in any room”, advises that we should never get into any investment that we are not prepared to hold for the long term.
Buffet said this because he knows how money is made, and he knows that the ups and downs of the markets are a normal part of investing. This means that the trick is not to panic, to batten down the hatches, and stay in for the long term.
Most of all, don’t pay attention to that panicked-looking person in the mirror!
Above all, do not rush every morning to check the value of your portfolio. Realise that with our guiding hand, you are in there for the long haul. Every market downturn is temporary, if you can take a long-term view.
Professional investors are aware that, in value terms, what goes up, must come down. However, our perspective and experience have also shown us that what goes down, must come up.
We have seen downturns before. You can trust us that we are monitoring your investments all the time; take comfort in that, and if you do like to check your portfolio, do it perhaps twice a year. We do the worrying for you.
We were not surprised in the slightest that many of our clients were alarmed and rang us up for reassurance. In monetary terms if you have £200k saved, that’s £70k down. But being asked for reassurance is part of what we’re here for. We advised them as per the above.
The pensions consultancy LCP did some research in the first half of this year, showing how unwise it can be to take your money out of stocks and place it in elsewhere, perhaps in cash investments.
By cash investments, we mean the good old bank savings account, or a Cash ISA.
Many people did this in the past year, because they thought it wiser to bring their savings ‘into harbour’, a haven where it was sheltered from the volatility of the stock markets.
Let’s think about that for a second.
If the people LCP talked to had asked us, we would have pointed out to them that even the best savings accounts are offering a less than thrilling 0.5% interest rate at the moment, many are offering much less. Given that inflation was 2.5% in June, and could well go higher, then prices would be growing faster than your savings. This means your money would be losing spending power.
If they had left their savings invested in stocks, either in their pension or via investment funds, however, LCP calculate they could reasonably expect to achieve growth of 4.4% a year.
In other words, by losing their nerve and shifting into cash they had cost themselves 3.9% in growth they otherwise could have had.
So if you need to know how to deal with market volatility, give us a ring.
Do not look in the mirror!
Past performance is not a reliable indicator of future performance.
The value of investments may go down as well as up and you may get back less than you invest.
1 https://ifs.org.uk/publications/14773
2 LCP: Have Pension Freedoms Cost Savers £2bn in Lost Returns?” 7 July 2021
https://www.lcp.uk.com/media-centre/2021/07/have-pension-freedoms-cost-savers-2bn-in-lost-returns/
