Earlier this year we dipped into a global equity bear market – you have no doubt seen the headlines. Maybe your portfolio has taken a hit, or maybe you’re waiting ‘for the right time to invest’. Whatever position you’re currently in, no doubt there are question marks over ‘where’s the bottom?’, ‘what if there’s a recession in the USA?’, ‘when will inflation ease?’ and ‘what’s happening to interest rates?’.

These are all good questions for Select Investors.

Unless you have a crystal ball, no one knows the answers. There will be commentators that guess and others that think there are clear ‘signals’ higher or lower. The truth is that as a long-term investor, with a diversified portfolio, we don’t know, and we don’t
need to know.

There are some well-known phrases in investing that we hear a lot when the market is down, but I think sometimes when we hear things so frequently, we don’t pay attention to their meaning and how relevant they can be to our own situation. Let’s take a closer look.

“Time in the market, not timing the market”

This phrase doesn’t compute for a lot of people. It means, forget any idea about trying to time the top, near the top, the bottom, or near the bottom, as you will invariably get it wrong. Don’t sell out of the markets at any point. By all means, rebalance and adjust a portfolio, but do not sell out to cash and wait. We know from industry insight that if you do this, you will almost certainly miss the best days of the market recovery and probably end up buying in at a higher value than you sold. This leads to a significant difference in cumulative returns. For example, $100,000 invested for 20 years in the MSCI* World index to December 2021 would be worth $470,508 if you did NOTHING. If you missed the best 20 days in the market over those 20 years, it would only be worth $167,608**. More than $300,000 missing!

The best time to invest is always ‘right now’. We just talked about how we can’t time the market and it is because of our emotions. If you sit by and watch the markets go up, down or sideways and don’t participate, we know with absolute certainty that you will miss out. We don’t know what’s happening tomorrow, next week etc, and it doesn’t matter; we know that in the long-term markets are likely to rise and that you need to be invested to benefit.

The timing of your investments or investment plan pales in comparison to the action of doing it in the first place. This leads me directly to the next one.

“Watch the tide, not the waves”

Markets will rise and fall in the short-term, it’s called volatility and sometimes falls can be significant. However, history tells us that markets tend to rise in the long-term, despite short-term fluctuations. Compound Interest is the ‘most powerful force in the universe’. It’s unproven whether Einstein really said the phrase or not, but its significance cannot be ignored. The important bit here is the re-investment of growth, income, and/or dividends. The alternative is ‘simple interest’, which would mean for example a $100,000 loan that pays you 5% interest per year that you take in cash and keep, at the end of 30 years, you will receive the $100,000 capital back and you would have received $150,000 in interest over that time, a total sum of $250,000.

If you had re-invested that interest, you would have over $440,000. The longer you invest for and the higher the growth and/or interest, the more exponential the compounding becomes.

“Diversification is the only free lunch in investing”

Concentration into too few investments is inherently high risk. You can reduce your volatility and improve your long-term financial wellbeing through consistency of returns by sensibly diversifying your investments across more holdings and more asset types, countries, and sectors. No one asset performs the best all of the time.

“Behavioural Finance – your emotions can be your worst enemy”

Market movements reflect human decision-making, with all its attendant intellectual limitations and emotional biases. However, when markets are moving quickly – either up or down, it is all too tempting to make rash decisions driven by emotion rather than logic. Those decisions may pose a threat to your long-term financial health. The point that investors are the most negative about the markets is often the time of maximum opportunity. As per Warren Buffet’s famous saying, “Be fearful when others are greedy and be greedy when others are fearful.”

I can tell you that we are in a period of opportunity now. The markets have fallen sufficiently to be in a period of opportunity. That doesn’t mean I know where the bottom is, it doesn’t mean the markets can’t fall any further, but it does mean that you can enter the market now at significant discount to the start of the year.

“Remove your bias from the equation”

It may be that you should engage professionals that can help you to focus on the long-run outcomes and who are going to be able to remove the emotion and build sensible, steady, diverse plans that fit to your goals, around your appetite for risk. It may be that you can remove yourself from the decision making on investment portfolio altogether and hire a Discretionary Fund Manager (DFM). To find out more about how a DFM might be a great solution, watch my interview with Tim Cockerill of Rowan Dartington, our DFM at Select Investors and St. James’s Place here. For advice on building a plan, please get in touch with david.reynolds@sjpp.asia

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*Source: MSCI

**Source: Financial Express, Analytics