What is the essence of successful long-term equity investing? It’s embedded in the right focus – on things we can control and things that matter. It means basing our investment policy on our financial plan as distinctly opposed to a view of the economy, the markets and the daily noise surrounding them.
Uncertainty is here to stay; we have no say in that. So, we spend time and energy on keeping our heads down and continuing to fund our plan – we have a full control over that.
Here we are in a tectonic shift in the world’s geopolitical order, occasioned by Russia’s tragic war on Ukraine, the severe supply chain issues caused by offshoring of manufacturing and services to Asia. And we find ourselves in the grip of the most severe inflation outbreak in 40 years. No one can begin to predict how these situations will resolve themselves (even though it doesn’t stop many from trying)…much less when. Nor can anyone begin to imagine how the capital markets will adapt to said resolution(s). We are once again in a perfect cloud of unknowing.
It is also - and this is what we find human nature can often be bitterly incapable of grasping - irrelevant to the investment policy of a long-term, goal focused, plan-driven investor. And I say again: current events are perfectly irrelevant to the investment policy of the long-term equity investor.
What is the essence of successful long-term equity investing? It is the continuing practice of rationality under uncertainty. To me it means basing our investment policy on our financial plan as distinctly opposed to a view of the economy and the markets. This is where rationality begins and ends.
Two years ago, we could not begin to imagine how lethal the pandemic was going to be, nor when effective vaccines would become available in sufficient quantity. Today, we can’t anticipate what Putin will do in Ukraine, nor how the back of this inflation will ultimately be broken. Nothing has changed; we’ve just moved on to a different set of unknowables.
Meanwhile our clients’ retirement dates are bearing down on them at the same pace. The amount of money they need to accumulate has if anything gone up with inflation. And the only hope they have in the world for a secure retirement and meaningful legacy are the premium return of shares of brilliantly managed companies, whose short to intermediate-term corrections cannot be anticipated, much less timed.
What we can know amid all this uncertainty—and just about all we need to know—is that the great companies in Australia and the world are already adjusting to this reordering. Today’s crisis invariably becomes yesterday’s news. Not only will you not be worried about this stuff ten years from now, you won’t even remember it.
It all comes down to the main reason you hired us, to acting vs. reacting: keeping your head down and continuing to fund your plan, looking neither to the right nor to the left. Looking at history, not headlines.
This is a glorious time to be a mainstream share investor for the long haul - even if, just at this moment,it feels like we can’t see a foot in front of our faces.
We realise that on any given day, optimism can often sound like a crazy concept while pessimism on the other hand can feel like a good advice from a friend. We also realise that ours may be the only calm voice of long-term optimism you hear. We just want to make sure you hear it. Today’s the day.
Key takeaways:
- Try to minimise the noise. If news headlines make you feel uncomfortable,reduce your exposure to them. Their objective is to capture your attention, not to provide you with rational investment strategy.
- Follow your investment plan, not headlines. Your plan is carefully designed to help you reach your life goals. If your goals haven’t changed, your investment strategy most likely doesn’t need changing. Only people without plans follow the headlines (they have nothing else to focus on)
- Remember fundamentals. History doesn’t repeat but it rhymes. Look at the spread between the real-life returns (after inflation) of growth assets like shares and the real-life returns of cash and bonds.
- Price versus value. When price (e.g. share price) of an asset decreases, the value of investing in that assets increases (and vice versa). If you’re still contributing to your investments/super, lower share market prices represent better value for your money.
- Income vs account balance. If you already retired and your investment objective is to generate a lifestyle sustaining income, that income is paid based on the amount of your investment units, not your account balance. Make sure you focus on the right thing.
- Optimism is the only realism. Having the faith in the future is number one investment principle we follow. It always gets tested when markets correct, and it can make all the difference.
If you get ever concerned about your investment strategy, please always contact your adviser before you make any decisions. It’s one of the main reasons you hired us.
Michal Bodi
Partner and Senior Financial Planner
Do you have a long-term investing strategy in place?
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General Disclaimer: While every care has been taken in the preparation of this document, Sydney Financial Planning and Charter FP make no representations or warranties as to the accuracy or completeness of any statement in it. This article contains information that is general in nature. It does not take into account the objectives, financial situation or needs of any particular person. You need to consider your financial situation and needs before making any decisions based on this information. Please seek personal financial advice prior to acting on this information.