What is Normal?

The sketch above from Carl Richards reminds us of the fact that the calm serene rise of markets year on year does not exist.

Carl explains his sketch as follows: –

“Imagine being in a boat in the ocean on a very still day. No wind. No swell. The water is as flat as a mirror. The calm goes on for a just long enough for you start to feel like it’s normal. Then when a small wave comes, it feels huge, and regular waves feel enormous. As scary as it might feel…remember waves are normal. Occasional storms are normal. And the last thing you want to do when you get into one is abandon ship.”

I know I am probably going over similar ground to last weeks blog but it is important to remember Volatility is the price you pay for participation in equity markets and for the potential for higher returns than cash.

As always, we are bound to see the media and industry commentators put forward lots of very plausible reasons for this sudden spike in market volatility.  No doubt many will point to fears of rising interest rates due to Trump’s tax cuts ‘turbo-charging’ the economy…however, we should regard this purely as white noise and ‘sit tight’

Market corrections are a normal part of the market cycle and happen from time to time.  It’s nothing to fear, just a part of how equity markets operate.

Our clients with money exposed to global equity markets all share many important attributes:

  1. They are long-term investors.  This attribute makes short-term market volatility less important.  Rather than looking at how an equity market performs during the course of an hour, day, week, month or even year, we’re interested in multi-year investment returns.
  2. We ensure that our clients remain suitably diversified.  This means that equities are not the only element within their investment portfolios.    This diversification is important because different investment types tend to behave differently at different times.    Having a well-diversified portfolio softens the blow of any short-term volatility in equity markets, as you are never fully exposed to UK, US or global stock price movements.
  3. We take careful steps to assess attitude towards investment risk, your risk capacity and your need to take investment risk in order to achieve your financial goals…including determining the degree of short-term falls that can be tolerated in pursuit of longer term gains.

This deep understanding of investment risks means that the volatility we are witnessing should be tolerable in terms of your emotional response to the event and your financial ability to withstand falls within your portfolio.

Despite these three very important attributes, it’s only natural that market volatility prompts some nervousness.

If you’re feeling at all unsettled, we want you to call us and chat about it…. that’s what we are here for.

In fact, as we have said on many occasions, our job as Financial Planners is less challenging during periods of rising markets, it is when markets experience falls that we work harder and really earn our fees by promoting investment discipline, explaining what is happening, and demonstrating how this fits into your overall financial planning.

 

The above information is provided for information only. It does not constitute investment advice, recommendation or an offer of any services and is not intended to provide a sufficient basis on which to make an investment decision.

 

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