RANDS AND SENSE
By Mariska Comins
There is a Chinese curse which goes “May you live in interesting times.”
Looking at global news headlines, we are inundated with negative news – from concerns about the war in Ukraine, the possibility of a global recession and uncertainty about the future of global inflation and interest rates. Locally, things appear equally uncertain and gloomy.
So, it’s fair to say we find ourselves in interesting times, which means that financial advice is more important than ever. However, many clients may find themselves wondering if there is any point to making plans under such uncertain conditions. How, given all the current macro uncertainty, is it possible to approach financial planning when things appear to change at the drop of a hat?
Although this may seem like an insurmountable challenge, it is possible to plan successfully amidst uncertainty. Doing so starts by encouraging a focus on clients’ overall financial goals, and the factors under their control. Although the world may often feel very out of control, there are a surprising number of factors that are entirely within investors’ control. These include: drawing up a detailed budget; understanding your goals/needs; an action-orientated plan to achieve each goal; the ability to tolerate volatility; and a suitable time horizon.
Our experience has shown that our clients’ long-term outcomes tend to be far better when the focus is placed squarely on these factors, rather than focusing on the short-term ups and downs of the market. Performance will always be relevant, but it should not be the focal point or an overriding consideration for clients. While it may induce a lot of anxiety, the behaviour of the market is not under investors’ control and thus obsessing about market movements is counterproductive.
Moreover, while especially equity markets are highly erratic on short time scales, this volatility smooths out over longer time frames, and returns become far more predictable, giving us relatively high levels of confidence around the assumptions used in the planning process. The graph below uses historical returns from PSG Wealth Creator Fund of Funds to show how the range of outcomes become less varied and more predictable as the investment period increases. The height of each bar indicates the range of recorded outcomes, and the blue bar shows the average return over the period.
ANNUALISED RETURNS OVER DIFFERENT PERIODS
Thus, a lot of the anxiety clients experience about short-term market movements is actually irrelevant when viewed on the longer-term time frames that apply to their financial plans. But because investment performance can cause emotional reactions which can lead to impulsive decisions, focusing too much on performance can be detrimental. Advisers add value when they help their clients manage their behaviour and reactions to market events and stick to their financial plans.
This is especially important in the current environment, where we are experiencing extreme volatility in risk assets, while inflation is high and cash investments are unlikely to deliver the required long-term returns needed to achieve financial goals. Separating the short-term volatility from the long-term goal is key.
It is also important to consider that while market volatility causes a lot of anxiety, it also creates opportunities for investors. While it is very difficult to block out the external ‘noise’, this is the only way to ensure that our judgement is not clouded and that sound decisions are being made with a long-term view.
There can be little doubt that current market and macro conditions are causing discomfort for investors. But don’t let this turmoil distract you from ensuring you have a financial plan in place. There are a surprising number of factors that are firmly under your control, and long-term planning should not be derailed by short-term noise. Despite the inevitable market turmoil, having a long-term plan is still the best way to achieve your financial goals. Especially when times are most certainly interesting.
Mariska Comins is Head of Technical Support, PSG Wealth