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Market cycle or life cycle, which is more important to you?

15th August, 2018

For most individual investors investment success means having the financial freedom to live the life you want to with the ability to spend time on the things you value. This is a broad statement, but it gets to the heart of what we are trying to achieve by investing. Money is a means to live the lives we desire for ourselves and our families.


Simple but not easy

We believe that good outcomes come from aligning your investments with your financial objectives and time horizons. While this can sound quite straightforward it requires ongoing dialogue as circumstances and priorities change over time. Investment decisions should be driven by what is happening in your life as opposed to investment markets.

It can be challenging to maintain focus as you are bombarded with noise from market commentators offering opinions on what markets will do and what are the best investments to make at any given point in time. This advice does not serve investors well as it speaks to a short-term outlook which is not consistent with long-term success. The famed investor, Howard Marks of Oaktree Capital, has written about how good investing is simple but not easy. This gets to the heart of the challenge. We know what to do but sticking with it proves difficult.

A short-term focus of where markets will go or when the next recession will occur is not relevant for most of us as we will face multiple market cycles over the course of our investment lives. In truth, very few of us have a time horizon that is the length of the current cycle.

This is not to underplay the stress a market correction can cause. There is ample evidence outlining the emotional toll caused by falls in portfolio value but we must consider the alternatives. What do you perceive as the bigger risk to you?

  • A fall in value of your investment portfolio in the short to medium term
  • Not having sufficient funds later in life to meet your needs

There is risk in both scenarios, but the second has more consequences. So what can you do about this? Initially, it means understanding what being a long-term investor is and aligning your expectations to this.


Ensure a plan is in place

Over time investment markets will challenge you, make you question prior decisions and make you uncomfortable. As humans we are almost hardwired to seek certainty and look for the situation that can be answered by a simple approach and forgotten about. Unfortunately, when it comes to investment markets the only certainty is that there will be periods of difficulty and challenge.

This is why we view investing as a collaborative process. Sometimes the market will do the heavy lifting for us and it will appear relatively plain sailing. At other points in time it will not seem so straightforward and your behaviour will have a more significant impact on your returns.

Corrections, or bear markets, challenge all investors. A particularly vulnerable group to behavioural errors are the recently retired who no longer have additional income and whose investment assets are now the primary source of income. This change of circumstances introduces a new uncertainty which can be compounded by a poor market backdrop. In preparation for this change in circumstances it is important that you have a clear plan for meeting your income needs when that time comes. Correctly managing your portfolio at these inflection points can help sustain the long-term value of your assets. A 25-year retirement will see you facing multiple different market cycles. Understanding that it is not just about next year or the year after can help in achieving your goals.

As the cycle moves on we will continue to adjust portfolios to best position for long-term success within their mandates. However, we are conscious of the fact that there are many potential outcomes so it will not be a case of all or nothing but more gradual changes reflecting our view of the environment.

As investors we cannot control the economy or financial markets. We can control the level of risk we take, our spending and perhaps most importantly, how we think about our investments and the time horizon that corresponds to them. These issues should be the most important part of your discussions with your adviser and as ever, we would encourage you to have that conversation sooner rather than later.

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