The Superbowl and why you’re safe with a financial plan
The economic fallout of the Covid pandemic, rising oil prices, and the increasing likelihood of war in the Ukraine have sent global investment markets into a tailspin.
The pandemic in particular could not have been predicted, and proved yet again that we do not have a crystal ball that allows us to see what future events will hold. The only certainty is that there will be future events, and they will very likely induce volatility that will have a short-term affect on our investments.
However, in our recent webinar held in cooperation with 7iM, we discussed the fact that short-term events have only a short-term impact on the markets. Those of us with a 20 or 30-year investment horizon need not be overly concerned; the markets are resilient and always recover, as can be seen on the graphic below.
Despite their volatile nature, history shows that stock market investments consistently outperform cash. The renowned investor Warren Buffett puts it like this: “Stock prices will always be far more volatile than cash-equivalent holdings. Over the long term, however, currency-denominated instruments are far riskier investments than widely-diversified stock portfolios that are bought over time...volatility is far from synonymous with risk.”
The wisdom of a balanced plan
The plan knows that something will always happen. That’s why, at Smarter Financial Planning, the diversified plans we create contain asset classes that react differently to market movements, thus softening their impact on your investment portfolio. Just one example: when stocks go down, bonds tend to go up, and vice versa. In this way they offset one another.
I think of a balanced financial plan in terms of a sporting event, like the Superbowl which kicked off this weekend. American football is a sport with a long and proud tradition, with offence and defence not only on the pitch, but also in the nature of the game. The ‘offence’ is all the razzamatazz and mania that follows when the word ‘touchdown’ flashes across the screens, it’s the cheerleaders, the singing – all the things the crowds love that ensures the stadiums are packed every time.
The ‘defence’ is less showy, perhaps not as exciting as the offence, it consists of blocking out negative events i.e. the other team’s attack – but it is good defence that wins championships, and without it, a team is doomed to be the also-ran.
It’s defence that wins the game
In terms of investments, it’s the defence – having all the right things in place to protect your plan from volatility – that wins the game.
There’s an old saying among managers of tracker funds, who adopt a defensive strategy and sit on it, with very few changes, for the longer term: they say “whatever you do, do nothing”, and that just about sums it up. Defensive strategies may come across as less exciting, perhaps even as boring, but they win through in the end.
We also believe that a purely offensive strategy can go terribly wrong. Again, from the world of sport, the words of Mike Tyson spring to mind: “everyone has a plan ‘til they get punched in the mouth.” So defence is important.
Just look at the fortunes of some of the biggest companies over the past 20 years. Back in 2000 the top names were Cisco, Walmart, GE, Microsoft, but today, only Microsoft is still on top. It shows the cyclical nature of things, and how we can’t plan to stay forever with what we have now. We must be constantly forward-facing and looking to the future. In addition, betting only on the biggest companies can have its risks. The world’s top investors always warn against running with the herd, buying into the latest fad or hot stock. They mean that often it’s the less high-profile stocks that win through in the end.
So how should we approach volatility?
We give our clients the following advice: volatility has been around as long as investment markets have, and will always be a feature.
However, a diversified and balanced investment portfolio, given time, will always be immune to the short-term vacillations of the markets.
There will always be something to worry about – so don’t worry!