2016: Keep calm and carry on!

2016 has got off to a bad start for world equity markets. At the time of writing, the FTSE 100 Index is down around 6% year to date; the S&P 500 Index and the MSCI World Index are both down 8%. The reasons for this market volatility have been well documented in the press: problems with China’s economic growth; a tumbling oil price; and concerns over whether the US’s decision in December to raise interest rates was too soon.

With all this bad news hitting the headlines, it’s natural to feel unsettled and question your investment portfolio. Recent press headlines such as the FT’s ‘Worst start to market year in two decades’ (8 Jan) and the Telegraph’s ‘RBS cries “sell everything” as deflationary crisis nears’ (11 Jan) just make matters worse.

For those who have been in and around markets for many years, this is just another step – currently backwards – on the bumpy journey that we know stock markets provide. ‘Two steps forward, one step back’ is not an unreasonable mantra for stock markets. ‘Stick with it’ is another.

A little digging can also quickly unpick some of the sensational headlines. For instance, the MSCI World Index fell 9.5% in January 2009 and 7.6% in January 2008. Not quite ‘decades’, Mr FT!

Setting your investment approach based on someone’s opinions on when to be in or out of markets, which stocks to buy or sell, expectations on interest rates and which economies will grow the most is not a viable way of building wealth in the long term. Markets have a way of confounding expectations. All we really know is that over long-term time horizons, equities are more likely to deliver higher returns than bonds and cash.

The better option is therefore to stay broadly diversified and invested. At the same time, remember the ten things that you really can count on at times like these to make investing more palatable:

1. Markets will sometimes go up, sometimes go down, and sometimes move sideways.
2. Markets work pretty well. They absorb new information quickly, which will move stock prices – quicker than you can react.
3. Forecasts on economies, interest rates and stock markets are just speculation. They are definitely not facts.
4. You don’t make a loss unless you actually sell. That’s why it’s important to make sure you hold sufficient short-term cash funds to allow you to ride out periods of market volatility.
5. No one can time markets successfully. A decision to sell is coupled with an even trickier decision: ‘When do I buy back in?’
6. The biggest destroyers of wealth are therefore not the stock markets themselves but the investors who make emotional, rather than rational, decisions.
7. A diversified portfolio (stocks and bonds) doesn’t fall as much as the markets. The markets’ falls are not your portfolio’s fall.
8. You can’t control markets, so concentrate on what you can control – your own personal finances.
9. Stay with your financial plan. History shows that markets do recover from their darkest hour, and they will do so again in the future.
10. Faith, patience and discipline are the watch words of successful investors.

Alternatively, if you’d prefer to take the advice of Warren Buffett, one of the world’s most successful investors, here are a couple of quotes from him on the subject of investors who try to move in and out of markets:

• ‘We continue to make more money when snoring than when active.’
• ‘Our stay-put behavior reflects our view that the stock market serves as a relocation center at which money is moved from the active to the patient.’

The future is always uncertain, and there will always be unexpected events. Some will turn out worse than expected; others better. Staying focused on your plan and keeping a long-term time horizon is the only sustainable approach. Or, as the British Government put it in 1939: ’Keep calm and carry on.’

If you’d like to discuss any of the above, please get in touch with your Cooper Parry Wealth contact on 01332 411163, or email Jonathan Elsigood, jonathane@cooperparry.com.