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Time after time – Financial planning when markets are volatile

31st May, 2022

It’s only natural that when there’s volatility in the markets that we may feel a sense of anxiety in relation to our investments. Even the most diligent of savers and planners are not immune to panic. And in sudden bear markets, where markets are subject to prolonged declines, the investor can break a sweat wondering whether or not the markets will bounce back like they’ve always done before. We don’t know exactly how long the current bear market will continue, but during the kind of uncertainty we’re experiencing right now, there are a few core things to keep in mind.

1. Decades, not days

Most investors time horizon spans into the decades. It’s important to realise that headlines only focus on the day that’s in it. Your real focus should be on decades, not days. Planning for the long term means that you inevitably have to maneuver over markets ups and downs and not lose sight of the bigger picture. Market risk also decreases the longer you invest and time after time there are bounce backs in the market post a drop with negative scenarios built into prices setting the stage for recovery. Figure 1 shows the returns (in US dollar terms) you would accumulate over 10 years if you invested in the S&P 500 on the day these Time magazine editions were published, and you held the position for ten years.

 

Figure 1: Returns in US dollar accumulated over ten years if you invested in the S&P 500

Table of magazine cover dates and returns

Source :Davy and TIME magazine

 

A focus on decades goes for inflation also rather than taking a short-term view. In fact, high inflation can mean there is more of a cost to not being invested.

2. Control what you can control

You cannot control the markets. You can however, control what level of exposure you want in the markets and ensure that is well thought out and in line with your goals. Asset allocation is critical in these decisions. For example, you don’t want market exposure for money you will need soon. At Davy, we approach this process by first partnering with you to complete a financial plan, then using your bespoke plan to help steer the investment approach.

3. Know your numbers – financial planning pays

Having a financial plan means that you will be more aware of the proportions of your asset base aligned to risk appropriate investments. The recommended allocations are not the same for everyone and this is where the plan and your Adviser adds value. It’s important you know the numbers that are right for you and the split of investable assets between your Needs, Wants and Aspirations:

  • Needs: This is the cash reserve required to ensure that you don’t need to draw down from your investment portfolios at inopportune times. The greatest cost to wealth is selling at low prices because you didn’t adequately provision for this cash reserve. As a rule of thumb, we recommend you hold at least six months' annual expenditure if you are working and at least two years’ annual expenditure in cash if you are retired, but your requirement for liquid, easily accessible cash will depend on your unique needs.
  • Wants: The retirement number is the level of investable assets you require to ensure you can secure your retirement income needs. This number should be invested in diversified investments with the level of risk determined by your time horizon and preferences. These portfolios are designed in a way where correlation between asset classes can act as a defense when there is exposure to market dips.
  • Aspirations: For those that are lucky enough to have wealth in excess of lifetime needs, there is room for these assets to be invested in more opportunistic ones. These assets can have the highest exposure to market movements which is suited to longer time horizons such as investing for the benefit of future generations.

4. It’s not too late to plan as there is opportunity everywhere

If you don’t already have a financial plan, the financial planning process can provide huge comfort by giving you the peace of mind that you can ride the current storm. Ensuring the right structures are in place, as part of the plan, can have just as much impact (if not more) on your returns. For example, not utilising maximum contributions to your pension could result in you losing out on the tax break available. This is something your Adviser can provide more insight on.  

If you already have a plan, there is no immediate need to update it when markets get volatile. Our long-term assumptions take account of volatility, and we include stress tests to give that added sense of assurance. If you’ve recently entered the market, then stick to the plan. If you invested in the MSCI world index the day before Lehman Brothers collapsed in September 2008 your portfolio would today still be up by 270% today in euro terms, so long as you remained invested. Time in the market is key and is a far more reliable source of returns that attempting to time the markets*.

If your plan is a few years old, it could be an opportune time to pause and explore. Maybe there are major changes in your life, personal or professional, that put your existing plan, investment strategy and time horizon out of alignment with your financial goals. This is another area where your Adviser can add value.

It could also be a good time to revisit some planning areas such as lifetime transfer of wealth to future generations. With lower valuations, this may reduce the capital gains tax and capital acquisitions tax consequences of doing so today.

5. Some risk is necessary

It’s inevitable that you might feel more nervous about the markets at some times more than others. However, it is more important to keep focused on your goals. There is no point checking the bottom line daily when you’re playing the long game. Think of volatility as opportunity even if does lead to a bumpy ride in the short term.  And remember some risk is necessary in the pursuit of growth.

It’s always best to focus on the things you can control and try not to stress over the things you can’t.

If you would like to know more  about financial planning, or if you are concerned about your positioning, please contact your Davy Adviser who will work with you to decide if any pivots to your financial plan are required. If you’re not already a Davy client, why not request a call today Our team will be happy to schedule a meeting.  

 

*Source Davy

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