There’s a lot of political news (or noise) around at the moment, with the Trump transition, the to-ing and fro-ing over Brexit and Australia’s continuing leadership instability. But what does it all mean for your portfolio?
Of course, everyone is entitled to their own political opinions, so we’ll park that conversation right there. You may, however, be surprised how little relevance changes in government have on the performance of the financial markets.
From weeks before the U.S. election right up until today, talking heads have been telling us how significant this will be for capital markets. First, the pundits warned us of an imminent market slump. Then when the markets defied their expectations and rallied after Trump’s victory, they crafted an explanatory narrative of deregulation, infrastructure stimulus and tax cuts. Now, with markets going nowhere, the sages are blaming high U.S. stock valuation.
History strongly suggests these folks should pour themselves a tall glass of something stiff and be roundly ignored by us all. There are many reasons why this is so, but let’s remember the 4 most important lessons history (especially the last 12 months) has taught us:
1. Predicting the future is extremely difficult.
It is extremely difficult to predict the outcomes of macroeconomic events and even more challenging to predict how those events will impact financial markets. The share market is made up of millions of participants, each using all the available information and expectations of the future to push asset prices to a very close estimate of the present value of future cash flows.
To make an investment based on a prediction is pitting your knowledge/guess/gut feeling against the collective knowledge of all market participants. It is important to realise that your opinions and any information you hold is already mostly incorporated into current prices.
2. Investing is always uncertain.
The future is mysterious and there are risks inherent to that. Our success in managing those risks will determine how successful we are financially. We never know when the next correction or bear market will happen, but uncertainty is a good thing because it allows shares to provide returns above bonds and cash.
As Soren Kierkegaard said “Life can only be understood backwards; but it must be lived forwards.” Which is why, when looking back on times of market upheaval, we wonder how few saw the signs and naively praise those who claimed to.
3. Disciplined investing isn’t easy.
The last 12 months have provided a number of ups and downs in world markets, but remember, investors in shares are compensated for taking on the uncertainty of short term returns. To receive this compensation though, shares occasionally need to lose value.
Volatility is not your enemy, it works in the favour of the long-term investor. High volatility in the short-run provides rebalancing opportunities while returns over the longer term tend to be less volatile. The long-term feels like an eternity to live through, but those that maintain discipline will be rewarded.
4. If you’re feeling uncertain, read over your financial plan before reading anymore headlines.
Online portfolio access along with human nature makes logging in to check your portfolio valuation the first response during times of market upheaval. However, reviewing your financial plan would be a better use of this time as a carefully prepared plan will have taken those periods of volatility into account, and will have done so without worry/stress.
We use Monte Carlo analysis in our plans, a programme that runs thousands of scenarios, each drawing historical returns and volatility levels at random to generate the range of outcomes that show the probability of reaching your goals.