Joe Hawes, Chartered Financial Planner at CBW, London accountants, tax and business advisors, gives guidance on how to protect your investments in tough times.
Recent stock market falls are a reminder that investing is not always an easy ride. Whilst in 2017, the FTSE100 increased by 11.9%, last year there were falls of 5.3% and 6.5% in February and October respectively. In the longer term, the ups should exceed the downs but it can still be unnerving to see dramatic changes in the value of our investments, especially over short periods of time.
So what can we do to ensure our investment strategy remains on track even in challenging times?
5 reasons not to worry
1. If you are a member of the 1995, 2008, and 2015 NHS Pension scheme, your pension is based on your salary/earnings and number of years of service. Investment returns make no difference to the pension you will receive in retirement.
2. If you have a pension with a decades-long investment span, the fund will have many years to recover from a short-term hit.
3. If you’re making regular, monthly contributions over a long period of time, you’ll be buying at different prices. Therefore, you won’t be making all your investments at the top of the market. That said; you won’t always be buying at the lowest point either.
4. If you have a well-diversified portfolio of large and small companies, overseas equities, government and corporate bonds, and other diversifiers, such as commercial property, these should reduce the risk and exhibit shallower peaks and troughs in short-term performance. The premise being that not all asset classes will do well or badly at the same time so spreading your investments widely will make for a smoother ride.
5. Investment returns don’t just come from capital growth, equities produce dividends and corporate and government bonds pay interest. Where these are reinvested, the compounding effect over many years can be extremely beneficial. Crucially, the ability to pay a dividend or interest is not necessarily correlated with a company’s short-term stock market performance.
4 reasons to take action
1. If your investments are concentrated in a few different assets, such as equities or a few different shares, they will most likely go up and down faster and further than a well-diversified portfolio of equities, government and corporate bonds, property and cash.
2. If you’re looking to make a withdrawal in the next few years to supplement your income or following a pension drawdown strategy, it may be sensible to hold the next two to three years drawings in cash. Similarly, if you have a specific one-off need, such as helping your children with a lump sum.
3. If it’s many years since your investments were reviewed, you should schedule regular reviews to ensure that they’re performing as expected and are meeting your needs. These could be every few years if you are still contributing, or you’re a long way from retiring or drawing upon the funds. However, this should be done at least annually if you are close to making a substantial withdrawal or moving from an emphasis on capital growth to income generation and capital protection. What was suitable when a plan started may not be the best option as your priorities and needs change.
4. If you do not know what you plan to do with your investments, how do you know whether you’re on track? Investing for retirement or ‘the future’ may be sufficient when you’re starting out, but as your wealth grows and the point where it will need to support you draws closer, you must have a plan to check your progress. This should be part of the review process with your financial adviser. It will help to clarify whether an existing investment or portfolio is appropriate or whether charges are in order.
Solid financial advice
The main reason not to worry is also the most contrary: we can’t predict the future. Basing investment decisions on past performance or trying to ‘time the market’ is as likely to lead to disaster as triumph. The best financial advisers work with you to understand when you will use your money and help you to plan and invest accordingly. This includes detailed discussions about your attitude to risk, how you feel about volatility and whether you can withstand short-term downturns.
Your portfolio should be designed to meet your own specific needs and give reassurance about the future outlook and your long-term targets when the ride is rough, rather than smooth, such as at this time. Above all, rather than simply investing with no thought as to what it really means for you, a financial plan should be based around when you expect to spend your money.
2018 was a tumultuous year for investment markets, and 2019 suggests similar if not even more dramatic short-term swings. How, when or to what degree the political and economic backdrop (in the UK and around the world) will be reflected in short-term investment performance can’t be predicted. However, building a plan around your long-term objectives and understanding when you’re likely to use your funds, should help to clear the short-term fog and focus on the outcomes you’re trying to achieve. This should provide the greatest comfort when the rest of the world around us may appear to be chaotic.
This article was first written for and published in the February 2019 edition of ‘The Dentist’.
Joe Hawes has more than a decade’s experience in the financial services sector. He is a chartered financial planner who takes a practical approach, focusing on his clients’ goals to create financial plans that are best placed to achieve them. For more information on how to plan for your retirement, contact Joe on 020 7309 3888 or email email@example.com