There is always a dynamic tension that exists between the sensible, well-thought-out long-term financial goals that a new investor sets in place – often with the help of their financial planner – and the emotions that they are likely to experience in the moment, as markets respond to new information and their portfolio value is impacted.
This tension can sometimes be most acutely felt by both the investor and their planner in the early stages of their relationship when a portfolio either goes down, or sideways in the first year or so.
However, as much as Wells Gibson hopes all new clients’ investment experience starts with markets rising, the reality is obviously not always the case, as clients experienced in 2022.
From an investor’s point of view, an aversion to loss, the feeling of loss of control and disappointment at seeing hard earned money falling in value can feel unsettling.
From Wells Gibson’s perspective it can also be a challenging time, knowing that however sound the Wealth Plan, however sensible the portfolio asset allocation and however much time we have spent providing insight into the up and down journey our client will experience, emotions can often trump logic when a portfolio shows a fall in value.
At such times it can be useful to reflect on a number of things:
First, cash is the only investment that avoids losses, but only before inflation, and its low, long-term, after-inflation returns are unlikely to allow our clients to achieve and maintain the life that’s important to them, hence the need to add equities and bonds into the asset allocation. Do not be fooled by today’s high cash rates relative to recent years; they are an illusion for long-term investors and are not a substitute for a sensibly structured long-term portfolio designed to meet long-term lifestyles. Do not be tempted by them.
Second, it is the very uncertainty of the shorter-term outcomes of equities and bonds that delivers the longer-term, higher after-inflation returns that most investors need to meet their long-term lifestyles. The longer-term expected returns from a sensibly structured investment portfolio are far higher than those of cash.
Third, returns come from markets, not your financial planner, at least those employing a systematic approach to investing that aims to capture market returns (as advocated by Wells Gibson). Blame should not be apportioned to your financial planner because a portfolio has not gone up in value in the same way that praise should not be heaped on them if it has risen spectacularly! Markets are not predictable in the short term. Stay invested.
Finally, falls in portfolio values are not losses and have every likelihood of recovering in time. Patience allows the longer-term expected returns to be realised. Avoid emotionally driven investment decisions that might impact these longer returns.
Research by Wells Gibson revealed that over a 30-year period to August 2023, it’s not uncommon for investors to experience falls in purchasing power over two years, whereas 99% of five-year periods delivered a positive outcome i.e. gains in purchasing power (above inflation).
If you are a new investor, keep the faith and remain invested for the long term because that is what is required to give yourself a chance of meeting the cost of your desired lifestyle. If you have been investing for some time and been through one or more cycles of market falls and recoveries, hopefully, the tension between longer-term goals and short-term emotions will be greatly tempered.
If you would like to discuss systematic investing, please don’t hesitate to contact Wells Gibson.
As Charlie Munger, Vice Chairman of Berkshire Hathaway once said: ‘The big money is…in the waiting’
For more information, chat with the Wells Gibson team.