Over the past couple of months we have seen increased volatility, which has resulted in lower ‘year on year’ investment performance in comparison to the last couple of years.
You often hear that uncertainty is a cause of volatility. This suggests however that uncertainty comes and goes – in reality it is with us all the time to a greater or lesser degree. As markets are forward looking, and because the future is always unknown, we must ensure we are well placed to cope with this uncertainty.
We understand that in times of increased uncertainty (and volatility!) this can be hard, but we feel the experience of past events can help us all maintain perspective.
The temptation to react emotionally to events can be strong but this is rarely the best thing to do. We can see this by looking at past events.
In the heat of the moment in the financial crisis (2007-2009) some investors will, having decided ‘enough was enough’, sold from well diversified investments and added to cash. Those that stayed the course and stuck to their guns however have long since recovered from the crisis and typically benefited from the subsequent recovery and growth in markets. The same holds true for the ‘dot-com crash’, Black Monday and all the others.
We know it is important as Financial Planners to ensure that our clients are happy with the amount of investment risk they are taking within their invested portfolio. When we talk about risk, we generally mean the level of volatility within the portfolio, rather than the risk of losing money. It’s really important to make sure this is ‘right’ for you as this, in combination with a suitable cash reserve, can make the difference between being able to accept volatility or not.
Our philosophy remains the same at Eldon, in that we believe the most effective approach is to allow your investments to remain invested throughout good and bad markets. It’s the ‘time in’ the market that does the work rather than ‘timing’ the markets – especially when things are more uncertain than usual!