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keep calm post it

Ex-heavyweight champion boxer Mike Tyson had a famed saying: everyone has a plan until they get punched in the face. This is true of all plans, in particular financial plans. At Equilibrium we are strong believers in the merits of a financial plan, organising a client’s wishlist and then prioritising different objectives and creating an overall strategy for their wealth. Even though it is definitely worth remaining flexible (in response to changing circumstances such as children, divorce etc), plans need to be rigorous to testing times. The past few weeks have put this on the spotlight.

My colleagues at Equilibrium Investment Management have already written about the recent volatility in markets, what has caused these drops and how the firm has reacted. However, while we are seasoned financial planning professionals who know how to respond, I thought it best to give you some tips on what you can do in testing times. It is important to remain calm and keep a long-term view but hopefully the below will be a handy guide for whenever markets next drop off (this is a case of when, not if, as markets fall as well as rise).

Remember the why – Why invest? Last year, I discussed the importance of having a well-diversified portfolio (you can re-read why that’s important here); Asset allocation is one of the most important decisions when constructing a portfolio because some of the assets will react differently to the same news than others. With any investment, there is a risk that investments can fall as well as rise and whilst this cannot be entirely eradicated, diversification within an investment portfolio can help to reduce risk and volatility.  We would not recommend investing if you need these funds soon, in which case they shouldn’t be invested, investments should be held for the long term.

Just don’t look – We understand that you want to stay informed and up to date but what good will constantly scanning your phone for market updates do. A long term view should be taken when investing, as the markets will go down and up and looking every day can be frightening. Taking the UK Stock market since 1969 you’d have had a 44.8% chance of seeing a loss if you look every day, looking every month decreases that chance to 37% of the time, a year would be around 18% of the time and if we could push that out to 10 years a loss would only be seen 0.6% of the time[1]; We cannot guarantee that at the end of the 10 years the return on your investment will be positive, investments are volatile by nature, but by taking a long term view you could take the emotional volatility out of investing. Equilibrium Investment Management analyst, Neal Foundly, has previously written about why losses feel so much worse than any corresponding gains, so if you want to know more about that dopamine hit, you can read his blog here.

Avoid kneejerk reactions –In most situations the harder we work the better the results, but when Investing inactivity could pay dividends. The last thing to make in times of emotional stress is panic driven decisions. It can be hugely tempting, when an investment isn’t working out well, to pull the trigger and sell out due to our natural aversion to loss; but markets rise and fall, so you may come to regret a kneejerk reaction you make when after time markets ‘calm down’. Commit to “sleeping on it” before giving the go ahead can help cut out those knee jerk reactions.

Know the background – Despite what you might hear on the news, this is not an unusually scary time to be alive. It might not be obvious from the headlines but global PMIs (a measure of economic health in the manufacturing sector) are all growing and most quality of life statistics have been going up for years. Global stock markets have been a long term driver of returns through two world wars, more recessions than you count, entrance to the EU and no doubt exit from the same so it is hugely important to keep perspective especially since investment is a long term game. Legendary investor Sir John Templeton once said: The four most dangerous words in investing are: “This time it’s different”.

Don’t confuse risk with volatility – The only risk that matters is not having enough money at the time you need it to the live the life you want to, do you have the capacity to still live your life if an investment failed? Markets will always see volatility, it is the nature of the beast, here at Equilibrium asset management we do not want to be exposed to more risk than you are comfortable with. The ability to follow a plan and maintain composure sits with you adviser and at times when markets are particularly volatile it helps to remember that our colleagues at Equilibrium Investment Management are making investment decisions to provide you with the best possible risk adjusted returns during times of volatility.

Keeping a level head and a long term view in a time of panic, with market volatility setting off alarm bells in your head, is not an easy thing to do and despite everything you’ll still be going up against human nature. Keeping focus on your long term financial plan and your end objectives is crucial and this is where a financial planner can play a pivotal role. As a financial planner I do a lot of jobs for my clients and arguably one of the most important ones is keeping a calm head and helping navigate testing times. So, if you’re unsure about markets and are worried your plan may not be ship shape enough for rough seas, please get in touch with one of our team who’ll be more than happy to help.

Disclaimer: The content contained in this blog represents the opinions of Equilibrium Asset Management team. The commentary in this blog in no way constitutes a solicitation of investment advice, investment returns are not guaranteed and can fall as well as rise. This blog should not be relied upon to make investment decisions and is intended solely for the entertainment of the reader. 

[1] https://money.usnews.com/investing/articles/2016-09-29/how-will-robo-advisors-impact-the-future-of-investing