What should you be doing right now!

Pension lifetime allowance

This is exactly why I left a successful career in law to become a financial adviser…

It is at times like these, when there is widespread panic in relation to health and personal finance that I am reminded of why I chose this noble profession.

Having run my own business for the last 18 years I am all too familiar with the ups and downs and everyday challenges that being a business owner brings.

When you add to that the pressures (and joys) of being the father of two children under the age of 10, the current combination of COVID 19, its related challenges, and the current economic downturn, it can seem rather overwhelming.

I wanted to share with you my views on the headlines and general noise out there, so that we can make sense of where we are at present and also offer some guidance on what you can do going forward.

As I am not a medical expert, I will be specifically focusing on the financial/economic issues associated with COVID 19.

What gives me authority to speak about this? Challenging world events such as these are exactly what I have studied and trained to give advice on. Indeed, this is what I have done, day in, day out for the last 7 years. Believe it or not, at the age of 46 I am still studying and taking exams in my quest to be the most qualified adviser I can possibly be.

But enough about me, what is going on out there?

If you listen to the news (and it’s hard to get away from it these days!) you will hear phrases such as ‘stock market depression’ and ‘global recession’, etc.

This is my take on this – Yes, the FTSE and other world markets have been temporarily reduced by up to 33%[i], but what does this mean for you and your family?

I need to put this in perspective, the FTSE is a combination of the shares of a number of different UK companies. We are talking about share prices and most investors do not invest 100% of their money into shares alone.

Most investors will be invested across a wider range of asset classes in addition to equities. As an example, a person with a ‘balanced’ risk profile might have only 50% of their investment in shares, so the rises and falls will not be as severe, as this chart shows:

Therefore, it is important to remember that headline stock market falls do not mean that investors’ individual portfolios will have fallen by the amounts reported in the media.

The chart shows that the FTSE All Share, invested 100% in equities, has dropped 31.2% over the last month, whereas the collection of 199 multi-asset funds across 78 fund manager groups investing between 20% and 60% in equities, with the balance across other asset types including up to 30% in bonds, has dropped by 16.85%. In other words, it has suffered a decrease of approximately half that of the FTSE All Share over the same period.

Any drop in value is not pleasant, however it is essential to remember that media’s stock market headlines should be put into context with how an individual investor is invested across various asset types.

Lesson number one – Drops in the market don’t impact most people as much as you think

The next point to be aware of is where all of this features in the grand scheme of things. Again, to put this in perspective, the chart below shows the market decline in 1987:

It does look horrible, doesn’t it? But the market actually ended up that year up by over 6%! The dramatic fall grabbed the headlines and that is what we remember today. The steady 40% + gains in the first 9 months of the year are forgotten.

More significantly, below is the same “record” crash shown across a long-term graph (with the above time shown in the red box)

It is not much, is it? Hardly a blip. Perhaps not even worth a panic!

Lesson 2- Zoom out, look at the bigger picture!

The next point, and this is the big question, relates to how long all of this will last for.

The chart below shows the volatility of the FTSE100 over the last 10 years.  If you invested in May 2008, just before the crash in the market, it would have taken 23 months for the value of the investment to recover to its original amount. 

As can be seem from the above, the dramatic falls in the FTSE 100 in 2008 had all but recovered within under 23 months. So, for the medium-term investor – i.e. at least 5 years – even those investing at the top of the fall would have doubled their investment by the end of 2012, a mere 4 years later.

Lesson 3 – This may all be over sooner than we think!

What should you do with your investments in the current climate?

You will have heard the phrase ‘buy low, sell high’. This is a fundamental rule for those trying to time the markets. The challenge these days is that there is so much fear out there that this concept often gets turned on its head and, as the markets decline, fear takes over. This leads to non-advised investors selling or cashing in their investments (at the bottom of the market) rather than waiting for the market to increase before buying in again. This approach was succinctly summed up by a diagram by Carl Richards, the famous American commentator in his book Behaviour Gap:

Although this infographic is slightly tongue in cheek, it remains a fundamental principle that should always be avoided when investing.

The other point here is that it is exceptionally difficult to call the top or bottom of the market and almost impossible to call both, which makes following this approach of ‘trying to time the market’ even more questionable. My remedy to this is very simple and is revealed below:

What steps should you be taking at this time?

  1. Don’t Panic!

What is the first thing someone does when you tell them not to panic? Right, they panic! Therefore, I tell my clients that it is natural to feel a bit panicky, but don’t act on this urge to panic and pull out of the market. If your financial objectives have not changed then a change in the market should not be the reason to withdraw.

2.Take the long view

This is just a temporary decline and when we take the long view this is all part of the process of investing. Looking at the markets over the last 50 plus years we can see that 75% of the time the markets advance and 25% of the time they decline, however overall markets advance over the long term.

3. Use this as an opportunity

There is currently a ‘sale’ on in the market and investments are going cheap! The last buying opportunity we had was in 2008.

If you look ahead to when this is all over ask yourself, what did you do to take advantage of the current conditions that could have benefited not just you but future generations?

4. Ease into the market

Rather than invest a lump sum in one go and be again possibly subject to timing the market, there are a number of advantages to gradually investing back into the market. This can be structured to coincide with your tax free annual allowances.

5. Use any downtime to organise your finances

This is a great opportunity to take stock of your finances. Use your time to pull out all the paperwork for any old investments and policies you may have.

The average person has 11 jobs in their lifetime and if each job provided a pension, not only is this a lot of paperwork but also it leads to many people not knowing what they are invested in or how these investments are doing.

Consolidating all of your investments into one place where they can monitored to make sure they are doing what the should be doing is  a great step closer to helping you achieve your financial objectives.

Feel free to contact me if you have any questions on anything I have touched on above.

The value of your investment can go down as well as up and you may not get back the full amount invested. Potential investors should be aware that past performance is not an indication of future performance.  

[i] https://www.marketwatch.com/story/ftse-100-slumps-below-5000-as-uk-airlines-tumble-2020-03-16

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