Generally speaking, saving money and planning for your future are two key aspects of Financial Planning and getting this right as early as possible should be one of your main priorities, to ensure that there are no nasty surprises in the future. Putting money aside can be for a multitude of reasons such as for a “rainy day fund”, a house purchase, your children’s education or making sure that you have saved enough money to live comfortably in retirement.
Whatever your objective is, you can achieve this by either saving an amount of money each month or if you have already managed to save money in the bank, you can look to gain a better rate of return as interest rates are currently so low – in fact, once you take inflation into account, most money on a bank deposit will effectively be losing its value each month as things stand.
A view from a professional
Having given financial advice for well over a decade and seeing many cycles of market uncertainty, I thought it would be good to share my experiences and hopefully this article is going to highlight what things you need to consider and understand when saving and more specifically, investing in times of market volatility.
A natural reaction…
Understandably, a number of my own clients (and most new enquires that I have received recently) have asked for my personal view on whether their investment portfolios should be “liquidated” into cash, wait for the bottom of the market and then reinvest.
I cannot deny that in theory this makes perfect sense. The problem is that myself, and everyone else in my profession do not possess a crystal ball (I certainly wouldn’t be writing this article if I did) and timing the market is near on impossible, even for Investment Managers and traders that review portfolios and markets all day, every day.
History teaches us very important lessons for the future
Periods of economic downturn and uncertainty are not as infrequent as you might think and any good Financial Advisor who knows what they are doing will build in these “risk factors” when giving you saving and investment advice. Two key areas that must be built into any financial planning objectives are the term of the investment i.e. how quickly do you need the money back and your “attitude to risk” i.e. Do you want very limited risk and normally keep your money under the mattress, or do you prefer a high risk/high reward strategy or indeed, somewhere in-between?
By getting the above mutually agreed from the offset, this will mitigate a lot of potential problems and upset further down the road and by remembering these points (which should always be documented in writing), and taking into account the next few sections, this should give you the confidence to keep investing even when it may seem like Armageddon is just around the corner.
Whilst the above graph is specific to a US index, it highlights that over any long-term period, markets always correct and the long-term trajectory is always positive once a recovery has taken place.
We can look at this more closely from a global market perspective on the last five major downturns below;
What does this mean?
The main message to take from this is that unless it is absolutely necessary, an investor under normal circumstances should not sell their investments during a period of market downturn and volatility…. You have only lost money when you sell and consolidate any perceived loss.
In addition, the market recovery can happen so quickly that even by missing the rebound by only a few days when trying to “time the market”, this can have a substantial impact on the level of growth that you receive during this period. In summary, “timing the market” is more often than not likely to fail so therefore; this would almost never be my recommended strategy.
For most people and especially new investors, this is the absolute perfect time to invest and/ or even add addition funds whilst unit prices are so low.
As Warren Buffett says “Opportunities come infrequently. When it rains gold, put out the bucket, not the thimble.”
Can market volatility ever be a good thing?
The simple answer is yes! For those of us that are (or intending) to start investing an amount of money each month, volatile markets are exactly what we want.
Here is why… the principle of “Unit Cost Averaging” or also referred to as “Dollar Cost Averaging”.
To keep figures simple, let’s look an investment of 3500 GBP over a 7-month period.
Scenario 1 – The client invests 3500 GBP day one
Scenario 2 – The client invests 500 GBP per month over a period 7 months (3500 GBP total investment)
As you can see, under scenario 2, the client has much more value at the end even though during the 7-month period (also known as “term”), the unit price went down – this is exactly the same as what happens in the markets. Now imagine this same scenario over 5, 10, 15 or even 20 years.
This is something I’ll look at in the future.
Of course, this is something that goes hand in hand with your own personal circumstances however from experience, more times than not, the reason why people delay planning for their own future is down to a poor understanding of what is being recommended to them.
This is purely the fault the of the advisor that they have had the pleasure (or not) to meet and few people realise what the actual cost of delay could mean to them!
The above table assumes that a couple wants to achieve a total fund of 1,000,000 GBP by the time they are 60 for their retirement.
I believe the figures on the table speak for themselves so the point I am trying to make here is that if you have the means to, the earlier you adopt the practice of saving and investing money on a regular basis, the less painful it will be on your bank account as the years go by.
Now this amount may sound like a lot of money to most people but in fact, when you consider life expectancy and the fact that this may well be their only source of income, this 1,000,000 GBP will equate to around 40,000 GBP per annum based on today’s cost of living – Factor inflation in as well over the next X amount of years and things can look very different.
The above article was kindly provided by Luke David Hunt, Associate Director, Netherlands from Blacktower Financial Management Group and originally posted at: https://www.blacktowerfm.com/news/763-saving-and-investing-in-volatile-markets