With the increase in volatility in the markets the number of questions directed to me always seems to increase proportionately. While many of my clients are simply looking for some reassurance that things are still within the boundaries of what we are expecting, others are getting nervous and feeling the urge to make kneejerk reactions. When it comes to financial planning, in my opinion, you should always have such a long term game plan that there never arises the need make a fast decision under emotional circumstances.
Patience is often thought of mainly in terms of waiting for the big gains to come. There is indeed often a long time between when an investment is made and when the large profits are realised. But patience is much more critical in times of volatility. It becomes ever easy to forget that part of a long term strategy often involves riding markets both up and down through multiple cycles. The sad thing about markets is they cause our emotions to want us to make those kneejerk reactions at the worst possible time. They don’t get us out at the right time and then back in near the bottom, so it is best to sit through the cycle if we have planned properly and have no liquidity needs in the short term.
I have recently sat through a cycle in one asset class that has dragged on for about five years. Most of the funds that had been extremely consistent for over 20 years were having a very hard time with things. Many were putting up back to back losing years for their first time ever, only to have one small up year followed again by another loss. As hard as it was to be patient, many clients were able to do so and have now seen double digit returns from those funds offsetting other parts of their portfolio that aren’t performing well. Those who lost patience were in for the bad years but now are missing the good ones.
Always remember that markets are cyclical and make sure any money you invest is not needed for at least one full cycle of the asset class you are investing in. If you always follow this rule then you will never need to worry about panicking and selling at a loss in times of increasing volatility. We have had some very low volatility years and now it appears to be the time to cycle back to volatility. Stay patient and hopefully at least a portion of your portfolio is invested in funds that do well in a high volatility environment. I have never seen a kneejerk reaction pay off for any of my clients, so regardless of what comes to pass in the coming months I am sure cooler heads will prevail in the end.
David Mayes MBA provides wealth management services to expatriates throughout Southeast Asia with a focus on UK pension transfers. He can be reached at david.m@faramond.com. Faramond UK is regulated by the FCA and provides advice on pension and taxation.
