Have you ever been unhappy with how your investments have performed especially when they have fallen in value? Join the club. Not many people are happy when their investments decline apart from professional investors who take the opportunity to buy shares cheaply when the price falls as long as they still have faith in those shares. Famous investors like Warren Buffett adopt this approach. However, most people are not like Warren Buffett.
We are emotional human beings who are naturally upset when our investments fall in value. The concern is so great that a 2013 Harris Interactive survey found that more Americans were fearful of investing in the stock market than of death itself which is an astonishing finding.
What I have discovered since the pandemic is that clients are far more concerned about falls in the value of their investments than before the pandemic. We have had far worse investment periods in the past such as Black Monday, the Dotcom Bubble burst and the Great Financial Crisis yet clients are far more bothered about temporary corrections than they ever were in the past. This could of course also be a reflection of the fact that our clients are older and some of them are more prone to worry because this is a natural human trait of older age in most people.
So what is the secret to happy investing? Let me explain it to you with a real life example.
I know a husband and wife couple who are successful business owners and investors. They are friends not clients. The husband is a very experienced self-investor but his wife only started investing three years ago. She wanted to invest some spare cash so asked her husband where to invest. He gave her some tips. The resulting experience has been a very unhappy one for both of them.
You see the husband has an adventurous attitude to investment risk whereas his wife is a cautious investor. She initially wanted to invest long term but after just two years she wanted to sell her investments but she had suffered quite large losses on them in 2022. She now wanted to sell them to re-invest the money into a buy-to-let property. He told her to sell them even though they were showing large losses. She could not countenance selling them at a loss so decided to keep them. In the meantime, she criticised him on a number of occasions for his poor recommendations. He told her to re-invest the money into better investments but refused to recommend any to her anymore. As a result, a year later the investments are still showing a loss even though it has reduced. Neither person is happy.
The problem here is that his wife decided to adopt his investment personality but it did not suit her. Also, her circumstances changed so she needed the money sooner.
When advising clients we ask them to complete a risk assessment questionnaire. It is a psychometric analysis of your attitude to investment risk. We then discuss it and agree with you what is your attitude to investment risk. We also take into account your capacity for loss. In other words, how much money you can afford to lose without it affecting your standard of living.
During the meeting, I always show a 10-year past performance graph based on the 10 levels of investment risk. What this graph clearly shows is that the higher the level of investment risk the better the past performance but also the greater the volatility. The higher volatility in the higher levels of investment risk is because proportionately more is invested in shares and less in bonds and property than in the lower risk levels. So the client is made abundantly clear that long-term greater returns can only be achieved at the price of greater volatility. Clients understand this.
Nonetheless, when there is a period of poor performance some clients have a tendency to forget what was discussed and agreed because they don’t like their investments falling in value! That’s human nature I guess.
I can’t help wondering if the scariness of the pandemic has spooked a number of clients and made them more cautious. It is understandable of course.
The wars in Ukraine and Palestine haven’t helped matters either nor the soaring rate of inflation and bank interest rates. It has all caused a perfect storm.
However, storms come and go and over the long term, 10 years or more, equities outperform all other asset classes on 90%+ occasions according to the Barclays Equity Gilt Study.
So my message to you is to be yourself. Invest in the types of assets that suit your investment personality and don’t mimic anyone else’s. That way you can sleep better at night. If you don’t like high volatility then do not invest in shares. You need to be happy when investing. You know it makes sense.*
Past performance is not a reliable indicator of future performance. The value of investments can fall as well as rise. You may not get back what you invest. The information contained within this article is for guidance only and does not constitute advice which should be sought before taking any action or inaction. All information is based on our current understanding of taxation, legislation, regulations and case law in the current tax year. Any levels and bases of relief from taxation are subject to change. Tax treatment is based on individual circumstances and may be subject to change in the future. This blog is based on my own observations and opinions.