Times of struggle can pave the way for new priorities

The pandemic crisis and the imposed limitation of movement made us reflect on what’s more important in life. Now that we are facing a new normal in the way we work, live and play, we are all eager to make sure that our current actions and behaviour continue to be on the right path. More so than ever we want a healthy and safe future for ourselves and our loved ones. This translates to all aspects of life including our finances. You may even be rethinking your current investment strategies – Shall I stay invested or flee the market given the uncertainty ahead?

Head vs Heart

Over the past few months, we have seen governments rolling out supportive policies and plans to revive economies, businesses laying off their workers or evolving their business models to fit current market needs. It is easy to become preoccupied with day-to-day market trends and fluctuations, and to make hasty decisions during volatile periods.

Doubts arise, and we question our investment portfolios – trying to analyse and predict the market. But rises and falls are part of stock market life. Focusing on the big picture rather than short-term noises is important. People feel the pain of losses more than they enjoy the pleasure of gains. One of the most important things is that you don’t overreact and sell stocks and shares when they’re down. Typically when there are periods of market volatility or where prices fall, it’s often a time to consider adding more to your investments rather than selling them.

Warren Buffett famously said that he likes his stocks the way he likes his socks: on sale

A useful investment insight to keep top of mind is that selling funds when they are down is rarely the best approach. We have seen throughout time that staying invested is typically more beneficial in the long term.

Weather the storm & persevere

Every decade or so we see markets resetting and throughout history societies experience global financial crises crippling their economies: the 1929 Great Depression, the Asian financial crisis of 1997, the dot-com bubble crash in 2002 followed by the crash of US housing bubble in 2007. We’ve been through difficult times before, and we’ve seen how timing the stock market is virtually impossible.

The importance of staying invested

Ending wealth values after market decline

Source: Morningstar. Past performance is no guarantee of the future results. This is for illustrative purposes only and not indicative of any investment. The market is represented by the Morningstar US Market Index. Cash is represented by the 30-day U.S. Treasury bill.

As you can see from the chart above, research by Morningstar1 revealed what would have happened to $100 invested in 2000, through the 2008 global financial crisis and up to 2020. If an individual had stayed invested, their $100 would have grown to $311 but by moving into cash, this investor would have lost out on the market growth following the recession. Even exiting the market for a single year, this investor would potentially have lost around $108. You can imagine the significance with larger investments. Typically we have seen that the best policy is to stay fully invested over the long term and to remain focused on long-term investment objectives.

We have also seen that investing a fixed amount on a regular basis into a long-term savings plan can help smooth out stock market movements. This is often referred to as “unit cost averaging”. A good example of such a prudent investment approach is seen in markets such as Australia and South Korea where investors tend to make automatic contributions to their investments and were more successful versus other markets with different investment strategies.2

By saving a fixed amount on a regular basis, individuals are reducing the risk of investing a large amount in a single investment at the ‘wrong’ time.

1 ©2020 Morningstar. All rights reserved. The information, data, analyses and opinions presented herein do not constitute investment advice; are provided as of the date written, solely for informational purposes; and subject to change at any time without notice. This content is not an offer to buy or sell any particular security and is not warranted to be correct, complete or accurate. The Morningstar name and logo are registered marks of Morningstar, Inc. This content includes proprietary materials of Morningstar; reproduction, transcription or other use, by any means, in whole or in part, without prior, written consent of Morningstar is prohibited.

2 December 2019 – Morningstar Mind the Gap 2019 report titled “A Report on Investor Returns Around the Globe”

The cost of market timing

Risk of missing the best days in the market: 1999 – 2019

Source: Morningstar. Past performance is no guarantee of future results. This is for illustrative purposes only and not indicative of any investment. The market is represented by the Ibbotson® Large Company Stock Index.

Stay the course: Look ahead

As dedicated investors, it is normal to have doubts and question our investment decisions at every market movement and trend. We simply want to ensure our investments are protected – why not.

However, it is always prudent not to react too quickly and speak to your financial adviser to review your investment portfolios on a regular basis to ensure they are in keeping with your future goals. You don’t know what prices are going to do next month or next year but one thing that’s guaranteed is that prices are going to move around.

For long-term investors, it is important not to flee the market in a panic, but rather embrace the turmoil as an investment opportunity – you are likely to be better off in the long run.

David Kneeshaw – CEO of IFGL

Message from the CEO – September 2020

Moving forward

As you will know by now, Friends Provident International (FPI) is now part of International Financial Group Limited (IFGL). As the CEO of IFGL, I am delighted that the transaction is now complete and have the opportunity to speak to you.

Find out more