Keeping a rational perspective is key in difficult times
Sep 26 2008 by Peter Wagstaff
TWO factors said to motivate financial markets, are fear and greed. Many don’t like those terms, because they’re too emotive. But surely protecting yourself against high levels of risk is prudent, not fearful. Likewise, seeking a tidy return on your investments is not greedy, but responsible planning.
Take this beyond your own money, perhaps investing for your children, in a trust or in a pension fund and your attitudes may sharpen even further. Here in Newcastle, we work with clients and their other professional advisers, such as their solicitor, to understand their position and plan appropriately.
Most would admit that markets have appeared fearful at several points lately, following the worldwide credit crunch last autumn and after the collapse of US investment bank Bear Stearns in mid-March. In each case, we saw panic selling.
This was exacerbated, perhaps even caused by widespread selling from large institutional investors, pension funds and hedge funds. They were forced to sell assets (particularly corporate bonds but also equities) as liquidity dried up and as various types of bonds (especially mortgage-backed securities) were downgraded, reflecting concerns about their creditworthiness.
What’s to be done? Investors could note the words of Warren Buffett, the legendary investor, who recently overtook Bill Gates to become the world’s richest man. Buffett’s take on fear and greed is: ‘Be fearful when others are greedy and greedy when others are fearful.’
Buffett recognises that fear and greed are emotional extremes and that investors who can stay rational when markets are gripped by either have the choice to spot investment opportunities or avoid the worst traps.
Long-term investment managers like Coutts, try to avoid emotion and keep a firm, rational perspective on markets. Any wealth we manage should have a clearly identified and often medium term purpose, agreed with the client. We remain focused on that goal and that feeds through to more objective decision making.
So what does all this mean for investors? For those already holding investments, the clear message is not to panic. Equity investors, not speculators, should be long-term players. That’s because equities can hit these sudden declines. In exchange for these periods of volatility, they offer higher average long-term returns than bonds.
How? Equities give you a share in the ownership of companies, a productive part of the economy. Shareholders are entitled to an equal share of the company’s future profits, which are either distributed as dividends or reinvested in order to boost future profits.
So, for investors in equities, the best thing to do is to try to look through short-term turmoil towards the future. Positions can be adjusted marginally, but most well-diversified portfolios should hold up better than the equity markets during this downturn.
Whatever your circumstances, it is important to have a long-term plan and stick with it. After all, it is when you change plans that you risk buying at the top of a market and selling at the bottom. News may be bleak. It may take a lot of nerve to stand by your original objectives. But it pays to be brave – and that’s not the same as greedy.
