Keeping a long term perspective is key
So we’re a year on from Covid landing on Irish shores… and what a year it has been. A whole new language has entered our culture, with all of us now experts in social distancing, lockdowns, herd immunity and other such terms we had rarely if ever used before.
Many people have also learned lessons about investing, for many people unfortunately these have been expensive lessons to learn. If we roll back just over a year to 19th February 2020, the S&P 500 was at an all-time high of 3,386 points and sentiment for 2020 was positive. Then Covid started to impact, and five weeks later on 23rd March 2020, the S&P 500 had fallen off a cliff - by 34% to 2,237 points. All during this time, many nervous investors left the market, believing that surely the markets would go a lot lower as Covid restrictions really started to bite.
How wrong these people were. In their efforts to avoid further losses, they missed the market recovery, which bounced back to an amazing 3,756 points by the end of 2020 – a gain of 68% from the low point in March, with further gains in 2021 so far. Some of these people have been sitting in cash all of that time.
What does this teach us? Basically that none of us have any idea what’s going to happen in the short term. And that is why we constantly advocate that investing is not about winning short term bets, but instead the careful implementation of a long term financial plan and an investment portfolio to match that timeframe.
Success comes from a long term perspective
The road to achieving your financial goals begins with identifying exactly what your objectives are. Not for next year, but for the rest of your life. And then working with an expert financial planner who will help you to identify the price tag for achieving these goals, in terms of potentially the saving needed, the management of your spending and the careful construction of your investment portfolio. Once you have your plan, the key is to stay the course, letting time and the markets get to work over the long term. Of course your goals or circumstances may change, and for this reason regular review meetings are a critical element of the process.
Don’t try and pick winners
We hear it from time to time – “Should I not buy a load of Tesla / Gamestop / Bitcoin (or whatever the latest fad is)?” Our answer is that a cornerstone of an effective investment strategy is diversification. Remember all of the people who had their wealth tied up in supposedly rock solid Irish bank shares in the early noughties? Again wiped out by unforeseen events, at that time it was the global financial crisis. Don’t get distracted by fads – some people will make a lot of money, many more will lose huge amounts. Grow your wealth over time by diversification of your assets across sectors, countries and asset classes. When one area takes a hit, the impact on your whole portfolio is much less damaging.
“But now HAS to be time”
Emotions do funny things to people and can cloud decision making. They see markets falling (like last February / March) and decide that this time is definitely different, and that of course they must now exit the market. And so they do, selling out based on fear at really low asset prices. Time and again we’ve seen that trying to time markets is a fool’s game, because the market is devoid of emotion. The greatest destroyer of investment value is too often the investor him/herself, as their decisions are often taken based solely on emotion.
As the world’s most renowned investor Warren Buffett famously said, “Be fearful when others are greedy, and greedy when others are fearful”.
Don’t ignore your short term needs
We are not suggesting that all of your wealth be tied up for the long term, as you have short term needs too. We are definitely supporters of maintaining a fund to meet any short term needs you might have – emergencies that might arise, planned expenses in the next year or two or a bit of spare cash to enjoy life today. This is managed separately and differently to your longer term wealth assets.
So forget the fads, the supposed “dead cert winners” and crystal ball gazing when it comes to investing. Build a structured financial plan to achieve your goals, an investment strategy that will deliver these goals over the long term and then leave it to work over the years to come.