Mark Twain famously said that the only certainties are death and taxes, I would argue there is a third certainty; that investment markets will always be uncertain.
As we mull over the Trump victory, it is worth considering Financial Experts and other pundits who made predictions over the high impact but unlikely event of Brexit have shown to largely been wrong, with announcements from RBS in January saying “to sell everything” and other commenters suggesting that Brexit could have a short term pain on Global Equity Markets.
For a Financial Adviser it is extremely difficult to advise your clients in periods of extreme uncertainty particularly when human nature is to seek greater security. I have a number of individuals who I spoke to in advance of the EU Referendum vote in June, when we were looking at a small (circa 20%) according to most commenters chance of a vote to leave the EU, but with the potentially very significant impact. The problem with trying to second guess unpredictable events is that even when you make the decision “correctly” the outcomes are always uncertain.
For the RBS Economists who made a call to sell everything they are potentially sitting on assets that are now double digit percentage lower than they otherwise would be and since the commenters made their remarks their markets are up even though the result was at the bad end of their anticipations.
Time is a greater healer of investment markets and all clients, even those in retirement, typically have time-frames measured well in excess of a decade over which they will draw-down their funds and don’t need to cash them in, at least fully. This means that an individual can afford to whether ups and downs and by investing in a widely diversified portfolio they can seek to mitigate the size of these falls in particular, and continue to enjoy a retirement income.
On the flip side an individual who switches all their assets to cash, may sometimes make the right decision, but then be locked in through fear on how they switch out back into the markets. We noticed this with some individuals over the period 2008/2009 who then spent several years trying to get back into the market and missed the inevitable bounce that came starting from 11th March 2009. On this particular occasion although the rise in the markets, and particularly the Sterling based investments we look after, has been led by the currency depreciation in Sterling to a greater extent, and there may well be rocky road ahead, being out of the market would have had an immediate impact on their funds due to the likely devaluing effect of future inflation and the reduced purchasing power of the pound.
Our clients have a financial plan which takes into consideration potential movements in the market and whilst we do not seek to predict the future we aim to give them a good indication of potential “bad” and “good” outcomes as well as the long term expectation of whether they are on track to receive their long term ambitions. With this in mind, individuals can whether many turbulent conditions, and have confidence that they should achieve their long term goals irrespective of short term market volatility.