Well, here we are ten months into a significant market pullback in 2022 with many wondering what should we be doing?!
Inflation globally is at record highs; the US Dollar keeps strengthening on the back of aggressive interest rate hikes and an increasing demand for safe haven assets as many scramble to further de- risk their investment positions. At current levels, it is estimated that USD 30 trillion has been lost from Global Equity Market Capitalisation, which is the largest on record! To put that in context, for the full calendar year in 2008, USD 28 trillion was lost. This is also the first year ever that both the S&P 500 (US Equity Market) and the US Bond Market have declined by more than 10%, meaning there has literally been nowhere to hide.
Improving cash returns have lured some investors into locking in equity losses and taking a seat on the side-lines, but unfortunately inflation is also at record highs, so your real returns are negative. Meaning your purchasing power erodes over time, plus it is difficult to try and time your entrance back into the equity market at some stage. All of which doesn’t seem like a low risk nor wise investment call for our clients at Harbour Wealth wanting to build real wealth.
Of course, there are important tilts in asset allocation and tweaks that one can make to ride out this volatility in a bit more comfort.
However, history continues to prove to us over and over again that in times like these, often the best decision an investor can make is to do nothing major at all.
Having a level head and a calm and rational view, despite all the noise, is tough. Let’s be honest, bad news sells and sensationalism and hype make cover stories. By partnering with an experienced and award-winning team, a lot of the heavy lifting gets done for you. At Harbour Wealth we have a strict quarterly rebalance discipline, which mitigates the risk of being overexposed to any asset class or particular sector or region, rather allocating more to the sectors where prices are enticing and holding an investment exposure makes sense. We are also fortunate that our license allows us to fully understand and embrace alternative investments for our clients. In times like these, being able to offer equity-like returns with gearing and some capital protection is paramount as our ultimate goal is always ‘better outcomes for our clients’.
Last week I attended a fascinating conference run by Andy Hart from the UK called ‘Human’s Under Management.’ It was so refreshing being able to focus on the end client, on behavioural economics, ultimately reflecting on the privilege of being a Financial Planner, which allows us to make a massive difference in our clients’ lives.
There was a recent study conducted by Morningstar in the US, which aimed to quantify the most important characteristics of investors who were able to meet their financial planning objectives over time, thereby scoring high on their Financial Health metrics. Surprisingly the two characteristics that scored best were the ones that were in the control of both the Financial Planner and the end client.
They had nothing to do with the prevailing market or economic conditions, nothing to do with timing the markets and taking risk but were instead in areas which could be easily changed, if necessary. The first was ‘mental time horizon’ and the second was ‘confidence.’
Mental Time Horizon was assessed by asking the question:
‘When it comes to your money, how far ahead to you tend to think and plan?’
Most Financial Planners answered, ‘decades and generations’ whereas most clients answered, ‘months and years.’ Not surprisingly, there was a direct correlation between the further ahead people were thinking and planning, and the higher their net worth. Equipped with a long-term plan or purpose allowed clients the benefit of shutting out the short-term noise.
Confidence referred to clients’ financial peace of mind, about being able to handle whatever came their way, financially.
Such as losing a job, a loved one, a provider, dealing with short- term market volatility, high inflation, interest rates, etc. Again, there was a 70% correlation between confidence and general financial wellbeing. A Financial Planner could make a large difference for clients by building confidence in helping to steer the focus back to what clients could control, highlighting their support networks and providing reassurance that they have been through negative shocks before.
We are there to guide, simplify, recommend and advise.
This gives us great comfort at Harbour Wealth, as we have always focussed on our clients’ investment time horizon and ultimate financial planning aims and objectives. Our Fintech easily highlights to our clients how small changes today can have a large impact later on. Of course, there will always be short- term financial planning needs – mainly insurance related – that need to be covered, but our emphasis, where possible, is on a long-term perspective. We are there to guide, simplify, recommend, and advise. We understand and respect how hard our clients have worked to accumulate their wealth, the sacrifices they have made along the way, which is why we plan and build together to achieve our clients’ aims and objectives.