Someone once told me that “if it’s false and bad it’s news and if it’s true and good it isn’t”. While that assertion might be pushing it a bit, I think it illustrates a truism of our 24-hour media-driven world, namely that unsubstantiated and negative stories dominate the news.

Over the short term, investment market values react disproportionately to news, with prices adjusting all the time both to new information and investor sentiment. The more extreme the events, the more volatile markets will be. The current pandemic is a typical example of this dynamic in action. Because news is random and unpredictable, investment prices will invariably be random and unpredictable. However, over the long term, investment market values are driven by the earnings generated by businesses and the dividends they distribute to their shareholders.

When investment markets fall, as they did in February and March this year, many investors become more fearful and suffer from extreme pessimism. Sometimes those who need to invest for the long term become reluctant to invest ‘until markets settle down’. Others decide to liquidate their portfolio and revert to cash as a defensive move, even though their capital may still be well ahead of what they invested and they have no immediate need for access to the capital.

Good financial planners understand and anticipate such wealth-destroying behaviour in their clients and regularly remind clients on how to keep emotions in check. By the time you hear something on the news or read it in the following day’s newspapers, the market will already have adjusted prices to reflect the new information, so you will be too late to benefit from it.

Every time there is a major market shock the media peddle the line that ‘this time it’s different’ or we all need to head for the hills. Investors would do well to remember that the media needs to sell copies and advertising space and financial companies need to sell financial products that generate profits. The interests of the media and the financial industry are not aligned with those of investors. The next time you see an ‘expert’ opining on what’s going to happen next, ask yourself “if they really knew what was going to happen, why would they be telling everyone – for free?”

Investors need to remember that they will pay the price of poor financial decisions in the long term, not the media or financial industry which sells unhealthy investment strategies and products. The media is specifically exempt from the suitability requirements under which regulated financial advisers are (quite rightly) obliged to operate.

It’s worth restating the four key principles to financial success:

1.      Have a plan which reflects your money values, life goals, financial resources and risk profile

2.      Adopt an asset allocation which reflects your plan

3.      Ensure that your portfolio is periodically reviewed and rebalanced

4.      Stick to your plan through thick and thin.

While I can’t tell you that 2020 won’t be a bad year for investment markets, I can tell you that for long term investors it doesn’t matter. FFP clients have portfolios which are designed for all seasons, which allow them to get on with living their lives to the full and take the worry out of managing wealth.

 August 2020