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2022 has been a difficult year for stock market investors. Since January, the S&P 500 is down nearly 20% since its 4,796.56 high in January – putting it on the cusp of “bear market” territory. The FTSE 100 in the UK has fared better; up 7.77% from 12 months ago. With inflation rising and investors concerned about a possible recession looming, many are wondering how to make sense of the market uncertainty in 2022. How can you keep a cool head and “stay the course”, avoiding jumping in and out of the market?
In this guide, we at Cedar House offer some thoughts to help you stay invested with the strategy you agreed with your financial adviser. You’ll find content to show how turbulent times and short lived, when viewed through the bigger picture. We hope this encourages and helps you. If you want to discuss your own financial plan with us, please contact our team for more information or to access personalised financial advice:
020 8366 4400 or enquiries@cedarhfs.co.uk
Remember, cash is not “risk free”
During turbulent markets, it is tempting to think that “cash is king”. After all, it does not move up and down with share prices. However, in a high-inflation environment cash is a certain way to lose wealth (in real terms). If, say, your interest rate on a regular savings account is 1% but the inflation level is 9% (as it is not), then this will lose value even if your bank statement shows an increase in your interest.
This is why financial planners recommend only keeping 3-6 months’ worth of living costs in an emergency savings (easy access account). It’s also a caution against taking your money out of shares in 2022, due to fear of a bull run.
Whilst this may avoid some of the discomfort of watching your portfolio fluctuate, it will not stop you from losing money. Staying invested, however, gives you a chance to regain any losses with time (when markets eventually recover).
Recall lessons of the past
It wasn’t that long ago that the Covid Crash happened. On 16th March 2020, the S&P 500 fell
7% shortly after the market opened. The Dow industrials also dropped 12.9%. The former fell to the bottom about a week later (34%). Many investors panicked and sold their shares as news of the pandemic led to increasing fear. Yet markets soon calmed after western governments said they would be providing financial support packages during the lockdown.
By summer, markets had calmed and even risen up again. In August, the S&P 500 stood at 3,508 (higher than its pre pandemic levels). Those investors who sold at the “bottom” in March were surely nursing some deep wounds, regretting that they allowed themselves to panic.
Here lies a range of important lessons for investors during volatile markets. Firstly, it is difficult (perhaps impossible) to predict the market. Trying to “time” your investments is no guarantee that you will protect your wealth. In fact, by selling at a low-point, you are likely to be crystalling some losses (which otherwise would have been merely “nominal”).
Secondly, the case study shows – on a smaller scale – what tends to happen to stock markets over the longer term. Despite volatility in the short/medium run, they tend to eventually recover and rise as the wider economy regains trajectory towards growth. If you can stay invested, then your patience is likely to reward you in the years to come.
Take courage from your strategy
Broadly speaking, investors will fall into two categories. Firstly, there are wealth accumulators. These are people with a longer investment horizon before them (e.g. 20 or 30 years) and who have a higher stomach for risk/volatility. Here, you can often afford to be more aggressive with your strategy since you have time for your portfolio to recover during the (expected) market crashes lying ahead.
Secondly, there are wealth preservers. These people have already spent a long career building their wealth so it is ready for drawdown (or an annuity) in retirement. Individuals often switch to this strategy in their 50s or 60s, as retirement nears. The portfolio tends to be more “cautious” due to the shorter investment horizon, which may not allow time for recovery if there is a market crash. As such, more “defensive” assets usually take up a greater percentage of the portfolio – such as income-generating shares (“stable” dividend-paying stocks rather than “growth” stocks) and fixed-income securities, like UK government bonds.
In all likelihood, you should have identified which of these two categories you belong to – well before the current market volatility you are experiencing began. Your financial adviser would have steered you to an appropriate portfolio, given your financial goals and the amount of time you want to invest. Part of this process would have involved discussing what would happen if there was a market crash during your investment horizon, and accounting for this.
As such, take courage from your strategy. You and your financial adviser were (likely) ready for it, even if nobody could have predicted the timing. Remember what you both agreed when you had a cooler head, rather than making impulsive choices in the heat of market volatility.
Conclusion
Interested in discussing your financial plan with an experienced financial adviser? Get in touch today to discuss your financial plan with a member of our team here at Cedar House via a free, no-commitment consultation:
020 8366 4400 or enquiries@cedarhfs.co.uk