Guest post from Stroud Wealth Management
We will experience several coronavirus-like market shocks in our lifetimes, especially now that we’re living longer—which is why it’s so important to stick to a few basic investment principles. The headlines in the first week of the new decade were dominated by the impeachment of President Trump, fears of a new war in the Gulf and the UK’s impending departure from the EU.
COVID-19 was barely on the international radar. But by the end of January, the World Health Organisation had declared it a global health emergency. It was quickly evident that the world was facing what’s often referred to as a black swan event.
This, according to theorist and writer Nassim Nicholas Taleb, who coined the term, is an event that is rare and devastating in its impact, and seemingly emerges from nowhere—but with an element of retrospective predictability. The coronavirus pandemic falls very firmly into that category.
Economic crises are more common than Christmas
Yet there is a paradox at the heart of black swan events. While each is by definition unique, they occur with relative frequency. The first decade of the century brought us at least two, in the form of September 11 attacks in the US and the 2008 financial crisis—with the latter in particular having long-lasting, global implications.
For investors, there is a vital lesson in this. Because while each black swan event is a one-off, anyone investing for the long-term will experience several such events that can have serious consequences for economies, markets and investments.
And as average life expectancy increases, so too will the number of unique events and market shocks that investors must endure. There are now some 15,000 centenarians in the UK and a baby born in 2020 has a 50% chance of living to 100, according to the Office for National Statistics.
“There will be more economic crises in our lifetimes,” says Robert Gardner, Director of Investments at St. James’s Place. “During the last 100 years, there have been 10% more market pullbacks than Christmases. Everyone knows Christmas will come; think of volatility the same way.”
Source: Financial Express. Produced on a bid to bid basis, capital returns. Date to 28 February 2020. Past performance is not indicative of future performance and you may get back less than you invested.
The importance of principles and a long-term plan
Unlike Christmas, however, we don’t know when volatility and market shocks will happen. That’s why it’s essential for investors to have basic principles in place that they can stick to over the long-term, says Gardner.
Those principles include having at least three months of cash set aside in order to cover short-term needs and provide peace of mind.
It’s also about saving regularly and benefiting from pound cost averaging. By drip-feeding money into investments, you are buying units at different times rather than at one price, so that you buy more when prices are low and benefit when they rise.
Then there’s the golden rule of diversification.
“This means having a well-diversified portfolio of equities and bonds invested around the world across different sectors and companies, rather than trying to predict which sectors and regions will do well,” Gardner explains.
Investors should also use the various tax wrappers available in order to make their money work harder and review their plan regularly to keep it on track.
It can be hard at times like this, when there’s so much ‘noise’ around investment markets, for investors to make the right decisions for good long-term outcomes.
“That’s why speaking to a financial adviser and tapping into their expertise is so important,” says Gardner. “A financial adviser can stop you from making poor decisions and taking your eye off the long-term.”
If you want the long-term perspective on the current market uncertainty, or to know more about the Investment Management Approach to the 100-year life, just ask your St. James’s Place Partner.
Looking for a few basic investment principles and a long-term plan for mitigating the effects of market shocks? Whatever you need, St. James’s Place is there to help. Just ask.
The value of an investment with St. James’s Place will be directly linked to the performance of the funds selected and the value may fall as well as rise. You may get back less than the amount invested.
An investment in equities does not provide the security of capital associated with a deposit account with a bank or building society.
Source: FTSE International Limited (“FTSE”) © FTSE 2020 . “FTSE®” is a trademark of the London Stock Exchange Group companies and is used by FTSE International Limited under licence. All rights in the FTSE indices and/or FTSE ratings vest in FTSE and/or its licensors. Neither FTSE nor its licensors accept any liability for any errors or omissions in the FTSE indices and/or FTSE ratings or underlying data. No further distribution of FTSE Data is permitted without FTSE’s express written consent.