For financial professionals only
With mid-risk portfolios having fallen between 10 and 20% over the last month and the VIX volatility index spiking from a level of around 12 in January to over 70 today (CBOE, 2020), Paraplanners could understandably be feeling stressed out.
But while searching for the perfect answers for clients and advisers, you might take a moment to reconsider four fundamental learnings about investing. And try to tune out some of the noise.
Here goes.
On investing:
- We never know exactly what is going to happen next in markets.
- We always expect volatility in markets. It’s just been heavily masked by Quantitative Easing (QE) over the last decade.
- Our picture of portfolio returns is based on an equity risk premium, long term government interest rates, cash yields and inflation. It’s worth researching these indicators on a regular basis to inform your own view of expectations for portfolios with different asset allocations.
- If you take your long-term money out of the markets, you may easily miss the moment to get it back in. See point 1 above.
In summary, if you have money in the market that’s invested for long term goals, your best friend is a resolute frame of mind, and a focus on long term returns rather than on the pain of short-term losses.
A health crisis, not a crisis of capitalism
We have a rational expectation that this crisis will follow the pattern of other pandemics. This is the eye of the storm. We are seeing terrible news. But when it comes to evaluating the long term, there’s no reason to assume the long run relationships between cash, bonds and equities have been overturned. Our long run return projections from where we are today are as useful now as they were at Christmas. A planner could still rationally assume around 3% a year as a long run, real return on a balanced portfolio.
There’s a hole in my cashflow
What is not the same today as it was at Christmas is the value of most clients’ capital, unless they were holding cash. Most balanced, mid-risk investors will have taken at least a 10% loss. This will affect people in a variety of ways, depending on where they are in their life and investing story.
The greatest pain will be felt by people whose personal financial plans have low capacity for loss and were about to go into drawdown to retire. They are experiencing the worst effects of sequence risk. It is not rational to assume that their capital value will snap back right away to its former level – but it might. See point 1 above.
‘Might’ however is not prudent. Nor is imagining that taking a lot more portfolio risk offers a quick fix to the situation.
With age comes serenity
My first encounter with market downturns was in a City dealing room on 19th October 1987, so I should be used to all this. After the dreadful doldrums in the early 90s, the dotcom bust, Y2K and the financial crisis of 2008, it’s still unsettling looking at big paper losses (see point 4 above) as you approach your 60th birthday.
The sequence risk issue is a live factor in my investment numbers. Plans, financial plans, will need to be scaled back and maybe deferred, but life needs to be lived and faced with the overwhelming evidence of its fragility, that’s the priority. And that’s what I will do. With whatever investments I have to help.
This article is for financial professionals only. Any information contained within is of a general nature and should not be construed as a form of personal recommendation or financial advice. Nor is the information to be considered an offer or solicitation to deal in any financial instrument or to engage in any investment service or activity. Parmenion accepts no duty of care or liability for loss arising from any person acting, or refraining from acting, as a result of any information contained within this article. All investment carries risk. The value of investments, and the income from them, can go down as well as up and investors may get back less than they put in. Past performance is not a reliable indicator of future returns.