Written by Andrew Fort

These immortal words, from Lance Corporal (to give him his correct rank) Jones in the sitcom Dad’s Army, are very wise words in the world of investing.

As I write this article the world is in fear of coronavirus and stock markets across the world are panicking, recording significant falls not seen since the financial crisis in 2008. What should I do, I hear you say? Don’t panic!!  Corporal Jones spoke very wise words.

Some commentators, ever mindful of a sensational headline, suggest selling out of the market. Unfortunately, unless you are possessed of accurate foresight (perhaps a fortune teller?), this is seldom sensible as markets are not always rational. While they are a good representation of future earnings prospects in the long-term, they are exuberant and irrational in the short term. Even if you managed to sell before the current crisis (which actually began last year) you then have to make another decision as to when is best to re-enter the markets.

Although we live in a global economy, markets react differently in different places. As an example, the UK market has gone down by around -14% during 2020. It is now roughly the level last seen in 2016. The US markets have only gone down by -10%. The US market is still significantly higher, even after this fall, than in 2016.

Not all investments will fall in value. Bonds, specifically index linked gilts, have actually gone up in value by around 8% during 2020. A well thought out investment portfolio will be diversified across shares and bonds and will also be diversified globally as well.

While markets are extremely volatile from one day to the next, returns over longer periods of time are much more predictable. A relatively adventurous portfolio (60% shares, 40% bonds) would have returned around 9% every year, on average, over the last 31 years. The worst 5 year period over this same timeframe would still have seen an annualised return of just over 1%, not a lot different from cash.

As I have often talked about in this column, those people with a real financial plan are able to take risks that are likely to be rewarded. They will always keep a cash reserve for periods of great uncertainty such as we are currently experiencing. In this way they can wait for markets to recover, as we all hope and expect them to do, without selling their longer term investments at completely the wrong time.

A real financial planner helps people to identify how much risk they will be comfortable with and, indeed, how high a return they need in the first place. People with a real financial plan will still feel anxiety during market turbulence but they will be better placed to withstand the shocks.

March 2020