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 stock markets across the world are panicking, recording significant falls and due to interest rate rises and concerns about inflation, the bond investors are also experiencing capital losses since the start of the year. 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 stock market or stay out of bonds. 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 in January and move into cash before the falls then you have to make another decision as to when is best to re-enter the markets. If you are in cash then we know that the capital value of your money is generally safe but it becomes at risk from inflation over the medium to long term. Put simply, the purchasing power of your money in the bank is being eroded year after year.

Although we live in a global economy, markets react differently in different places. As an example, the S&P 500 has gone down in the US by around 18% since the start of the year. The FTSE 100 in the UK has only gone down by -4%.

Not all investments will fall in value. Property for example, has gone up in value since the beginning of the year. A well thought out investment portfolio will be diversified across shares, bonds and property 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 confident portfolio (60% shares, 40% bonds) would have returned around 8% every year, on average, over the last 34 years with 12 months highs of +46% back in 1992/93 and lows of -23% in the financial crisis 2007/08. 

As I have often talked about in my articles, 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.

June 2022