It’s no surprise to hear talk of the next market downturn, especially after such a positive run as we have experienced in recent years. What may be surprising is that investors who stay invested through downturns end up with better returns in the long run, than those who withdraw.
According to Dalbar’s Annual Quantitative Analysis of Investor Behaviour, investors are materially better off by staying invested than withdrawing.
The US based research examined equity investor returns against market returns across three, five, ten and twenty-year periods. The conclusion was that investors who remained invested were between 1.91% and 4.86% per annum better off. For example, using their ten-year data, that means an investor with $500,000 at the beginning of the period, who remained invested, would have $97,924 more at the end. That’s materially better off.
One of the most important things therefore that financial advisers can do for their clients is help them prepare for the next downturn so that they come through it in the best possible shape.
It is only natural to be worried about market falls and bear markets. It’s to do with our amygdala – the part of the brain responsible for the response and memory of emotions, especially fear. But ask yourself whether making decisions when you are overcome by fear is the best course of action. No, unless you are being attacked by a sabre-tooth tiger or woolly mammoth. Which is what the amygdala is for – to get you away from mortal danger.
Unfortunately, despite several thousand years of evolution since the days of sabre-tooth tigers, we can’t turn the amygdala off, so at times it can force us to take decisions that aren’t good over the long term.
In the recent sage words of Rob Everett of the Financial Markets Authority “Financial advice tends to be a long-term relationship and they [advisers] could be worth their weight in gold. Most will have seen their way through a couple of cycles and be far more objective and better at encouraging clients not to act emotionally”
So, perhaps the biggest issue is the fear of losing money over the short term rather than the actual loss of money over the long term. The sad reality is that those investors spooked by market downturns tend to crystallise losses and miss the bounce – the worst of both worlds.
To manage your fear therefore start to prepare with the following A, B, C of investing;
A – Always think of investing over the long term and when setting goals, work out the time you have available. And know that staying invested is better for you over the long term.
B – Be prepared. A good adviser will ensure you are well prepared, which will include being well diversified, being defensively positioned, and will have a plan to re-balance your portfolio throughout the market fall and subsequent rise. Talk to them at your next annual review about preparing for the next downturn.
C – Check that your adviser/fund manager has the tools available to protect your capital and manage through the downturn and can do so on a real-time basis. Such tools include the ability to increase cash weightings in portfolios, the flexibility to invest in defensive investments or invest in securities which benefit from market downturns, promptly. Also, the ability to ‘insure’ against losses using a range of financial instruments including derivatives.
Finally check that their interests are aligned to yours – are they investing alongside you and experiencing exactly what you are. Are you in this together? It’s normal to worry about market downturns. Staying invested with the right preparation will result in a better long-term outcome.
At Milford Private Wealth, we do ‘all of the above’.
Long-term investors: Our investment strategies focus on the long-term outcome. We’ve learned that staying invested over the long term is better for our clients.
Preparation: Through our discretionary management service, we actively manage your diversification and tactical asset allocation as markets change. At times of market volatility our active investment approach positions our funds and portfolios defensively to manage the downside and take advantage of buying opportunities.
Capital protection: We employ a range of tools and techniques to actively protect your capital and help you achieve better returns in the long run than those who exit the market.
Most importantly at Milford, our advisers, fund managers and all other staff invest exclusively in our own investment funds and KiwiSaver funds making our interests completely aligned with those of our clients. What happens to your money, happens to ours and we are in this for the long-term together.
A disclosure statement is available on request and free of charge.
Disclaimer: This is intended to provide general information only. It does not take into account your investment needs or personal circumstances. It is not intended to be viewed as investment or financial advice. Should you require financial advice you should always speak to an Authorised Financial Adviser. Past performance is not a guarantee of future performance.