2016
Keeping your head
David Flowers / 0 Comments /
Keeping your head
When Rudyard Kipling starts his famous poem, “If you can keep your head when all about you are losing theirs …” he is alluding to that serenity of mind that allows you to stand back from the fray with a certain confidence that you don’t need to be panicked into making rushed and reactive decisions as circumstances change all around.
As we watch many stockmarket indices go red, day after day, it would be easy to lose our heads. But fortunately our investment decisions are not based on stockmarket gyrations – whether they seem good (giving investors an opportunity to buy at low prices) or bad (providing less to those who need to sell now).
Have you noticed that the financial “news” is mixed? Unemployment is down, growth is steady, oil prices are down, inflation and interest rates are low. What’s not to like? On the other hand we are feeling the effects of austerity, not earning much on our deposit accounts and watching “billions being wiped off global stockmarkets” – as the headline writers like to put it.
Isn’t it a relief that our personal investment decisions are not affected by all these confusing and apparently conflicting signals? Our emotions may be stirred – that’s only natural – but emotions are poor mechanisms for financial decision-making. Did you know, for example, that if your portfolio shows a rise of 10% your positive emotions are less than the negative emotions linked with a 10% fall? We feel bad when the charts go red but not equally good when the charts are green.
So how should you make financial decisions? By addressing some key questions about your goals and by taking a long-term view. The best decisions are made with a long-term perspective and when they are directed toward achieving long-term goals. When we advise you about investing we are much more interested in these types of questions. We also a pursue a parallel track of helping you button down your attitude to financial risk. We are then in a position to recommend a balanced portfolio which invests in all sorts of things (possibly but not necessarily including stocks and shares).
In fact gory headlines are not necessarily related to one’s investment circumstances. The UK All Share Index has exhibited considerable volatility and is showing a loss of 12.5% for the last 12 months. A deposit account has not fallen in value but has barely grown. Our ethical portfolios have been less volatile than FTSE with the lowest risk portfolio rising gently in value and resulting in a return of +1.68% and the highest risk portfolio falling in value resulting in a return of -4.12% (for equivalent non-ethical portfolios the movement has been +4.09% and -4.13% respectively).
If your goals and risk led us to recommend a lower risk portfolio – you have enjoyed a positive or near positive return over the last 12 months. If your goals and risk led us to recommend the highest risk portfolio – it may be down by up to 4%. Not many people invest in that portfolio but even if you did, whilst everyone around are losing their heads, what enables you to keep yours? Firstly, have any of your goals changed? Secondly, does a 4% fall over 12 months change the long-term forecast for your investments? Thirdly, as a higher risk investor, you will be comfortable with short-term volatility precisely because it is irrelevant to your long-term perspective.
In fact if you have funds to invest at this time we would go through exactly the same disciplines in order to help you decide how to invest. And we would recommend various investment tools to make the current volatility work to your advantage.
The moral of the story is that I would encourage you to stand back, take an objective and long-term view and keep your head whilst others around you, fixated on the red ink written by the stock market indices, are losing theirs!
David Flowers
10 February 2016
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