Investors today are getting nervous… Markets remain volatile, we’ve seen another year of really strong returns particularly in the US, where the S&P 500 index grew by 25% in 2024, after also growing by 26% in 2023. This growth has been driven largely by “The Magnificent Seven” stocks, each of which are now showing extremely high price / earnings ratios. With US stocks now accounting for a large proportion of global indices, investors are understandably edgy.
Then you layer on top of this the uncertainty caused by a second Trump presidency and the ongoing risks caused by the conflicts in Ukraine and in the Middle East, it’s no wonder that some investors are asking if a market correction is on the way.
The answer is, no more than the next man or woman, that we simply do not know what the future holds.
What we do know is that your focus needs to be on things you can control, and we would like to remind you of a few behaviours that will likely serve you well in these uncertain times.
Always remember your time horizon
Short-term volatility is just that, short-term. Your investment time horizon will typically be more than 10 years, maybe 40 or 50 years if you are looking at your pre and post-retirement timeframe. This is what your plan is based on, so stay focused on your plan and your long investment time horizon.
Ignore the noise
This is probably the hardest behaviour to practice, with the constant stream of experts / analysts / doomsayers offering their opinion on where markets are going next. These views can be unsettling as you consider the impact their forecasts will have on your financial plans.
But their views are just that, their views – how many of them accurately forecasted the returns in recent years? Their thinking is usually a reaction to a short-term factor in the economic or investment environment. While at the same time, your plan is a long term one that will go through many different investment cycles. Shut out the noise, don’t react to every article you read and trust your own plan.
Judge success against your own objectives
The investment successes of other people are irrelevant, it’s worth always remembering that their objectives are likely to be very different to yours, and as a result their portfolio may bear little resemblance to yours. For example, they may be happy have a lot more risk in their portfolio. So, don’t judge yourself against the success or failure of others. Instead ensure that you’re crystal clear about your own objectives and that you have the right portfolio to achieve them. That’s all you need to concern yourself with.
Be realistic
Of course we would all love to achieve double digit positive returns every single year. But this is simply unrealistic, certainly without taking extreme levels of risk, which in turn increase the potential for significant downwards swings. Don’t build your plan around unrealistic and unachievable expectations. Instead build a plan that can be realistically achieved over the longer term in usual market conditions, with all their highs and lows. Then review the plan regularly to ensure it remains the most realistic way of achieving your goals.
Leave your emotions at the door
As probably the world’s greatest investor Warren Buffett once said, “Be fearful when others are greedy, be greedy when others are fearful”. The point he is making is that markets are often driven to extreme levels by irrational exuberance. This is demonstrated by people piling in and buying as markets soar upwards (greed), and by people selling out of markets that have fallen sharply (fear).
Of course Buffett was noting the contrarian opportunities. Instead of succumbing to the emotions of greed or fear, people should only consider selling when markets have had a good run and are now expensive, or buying in when markets have fallen and now are cheap. Yes, the investment world is a little uncertain at the moment. But this is all the more reason to stick to your long-term plan and increase your chances of achieving your goals.
Don’t try and time markets
We sometimes still get the call from a client that goes something like this, “I know my investment horizon has 8/10/20 years to run and that my portfolio is constructed with that in mind, but I really think markets are about to significantly drop and I think it makes sense to get out of the market just for a while”.
Trying to time markets is folly. Success comes from time in the market. The problem when you get out of the market is deciding when to go back in! Time after time, investors get this timing wrong as they sit on the sidelines and end up missing significant growth as markets quickly recover from a short-term and temporary setback.
Keep saving
This is important, wherever you are on your financial journey. While the amount you save will invariably increase and decrease in line with your need to save and indeed your capacity for saving, we recommend that this is one tap that should never be turned off completely. Saving is a habit, and once you stop it can be very hard to get going again. Small amounts matter too, so never think that they won’t make a difference over the long term.
It can be hard sometimes to stay focused on the long term and not react to short term factors. But doing this is a key element to achieving your objectives.