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5 Steps towards Investment Contentment During Uncertain Times

During many years as financial planner helping people achieve their financial goals, I have seen some emotionally driven and plain ill informed decisions that have led to poor outcomes. Emotions are more likely to drive decisions during uncertain times, so I'm writing down some tips to help you stay the course and not allow your plans to get de-railed.


Investment contentment in hammock by the beach
Photo Credit : Authors Own

Hello, my name is Jill and I am a life centered financial planner, helping my clients to save for their future, have the best life possible with the money that they have, manage risk and protect the ones they love. Here are my top tips for investment in uncertain times.



Tip #1 - Clarity over your Goals


Control the Controllables. What is it you are trying to achieve, saving for retirement, buying a house, or creating a passive income stream from your investments. Establish a clear investment plan aligned with these goals and be sure to take into account your time horizon and your emotional response to the ups and downs of investing. Then you can work out how much money you need to achieve your goal before reverse engineering it, to find out how much you reasonably need to invest and how often, to achieve your goal.


"Life can only be understood backwards; but it must be lived forwards." ~ Soren Kierkegaard

Having a well-defined strategy is within your sphere of control, it helps you stay focused, disciplined and will lead you to make better decisions.


The graph below shows the current capabilities of data processing. We can model all the likely outcomes and the variety of returns of a 60:40 portfolio ( 60% equities ) and use this to work out the amount of regular savings. This 30 year old is investing enough to achieve her goal to top up her retirement income. Assuming a mean return any excess returns over the mean, can only be a good thing.


Image 1 : Stochastic model showing the variety of returns form a 60:40 portfolio over time.

Source: EBI Turnkey software solutions.



Tip #2 - Diversify your Investment Portfolio


Once you have a clear plan, it doesn't pay to have all your eggs in one basket. The next step will be to select a mixture of investments, this mix of investments is called the asset allocation.


Returns vary and will be influenced by external economic forces, legislation, geopolitics, for starters. We don't know where returns will come from, so put yourself in the best position and spread your investments widely.


Just like the British seaside kiosk, stock up on ice cream for those hot days but also have some umbrellas and rain ponchos for those other days.

First select the asset allocation, what proportion will be allocated to company shares, how will this be balanced with other asset classes, company bonds, property, cash. Then allocate to these asset classes. Returns both positive and negative will depend on external economic cycles, changes in legislation, geopolitics and innovation. Different asset classes and the building blocks within them that form your portfolio will react differently in different situations. The aim is to have a spread of investments in different company sectors, geographies, size, product involvement. For example: we have recently seen the Inflation Reduction Act (Aug 2022), a raft of US legislation, that has offered financial incentives to increase renewable infrastructure construction, ( amongst other measures ) and this has pleased investors. In the UK however, whilst the construction of renewable infrastructure looked promising a few years ago, costs for projects have come under pressure with high interest rates and supply chain difficulties - same sector, different geographies.


Diversify and know whatever is happening the world your portfolio is picking up some positive returns somewhere.


"diversify as broadly as you can, far more than the supposed experts tell you" Mandelbrot and Taleb 11July 2015


Tip #3 - Time in the Market not Market Timing


During my time as a financial planner I have seem some emotionally driven and plain ill informed decisions that have led to poor outcomes for investors. I'm writing them down here so you can identify and avoid these bear traps. I'll focus on two points here. The cost of chopping and changing your investments and second the power of compound interest.


It is said that one of the roles of a financial planner is not to make their clients money, anyone can do that in a rising market but to guide clients through the rough times and market falls.


Here's the problem. It's natural to try and time the market, we all want to sell high and buy low. The thing is, uncertainty makes us do the exact opposite. As prices start to fall, fear takes hold and with further falls panic can drive a sell off. Now with cash in the bank, when do you buy back in ? The best days for investment returns often occur after the worst days, so do you wait ? When will this be ?


When markets fall it doesn't mean that companies have become bad companies. Falls are paper losses but selling crystallises the loss and using the sales proceeds to buy back in could involve a 30% difference. Keep doing this thinking that you are safe in cash could ravage your portfolio.


Stay invested, you will be in the best position for the recovery. When prices fall, if resources are available consider adding to your investments.



Image 2: The graph below shows the benchmark by which to measure the returns between 1990 - 2022 from a portfolio comprising 40-85% equities ( company shares ) Source: Cash Calc December 23


Reflecting back on Image 1 above, the stochastic model shows the power of compounding over time, the subject of another blog, another time but another reason to stay invested in let the dividends or interest payments buy more investments that will pay out dividends or interest and so it goes on...


Keep calm and stay invested.




Tip #4 - Discipline and regular contributions.


In his book, The Automatic Millionaire, best selling author David Bach includes a chapter called the Latte Factor. Its beautifully simple and shows that you don't have to be rich to live rich. You just need focus and discipline and where you don't have discipline you can have automated investments using a standing order or a direct debit.


The basis of the latter factor is the redirection of money that is otherwise"squandered". He had the example of the busy commuter stopping for a takeaway coffee on the way to work. Now we have the ability to order a coffee delivered to our desk. At £5.54 ( Costa coffee latte delivered by Uber Eats in central Manchester ) we might think it doesn't matter but what happens if you add that up over a working week, a working month and a working year and that could be £110.80 a month and up to £1,329.60 a year.


The graph below shows our same 30 year old who has now bought a thermos flask or uses the workplace coffee machine and invests £110.80 a month into a 60:40 portfolio, until they reach their state retirement age of 68.


By increasing contributions by inflation at 3.5% and relying only on consistently average returns, at age 68 our coffee drinking office worker could have a pot worth £306,603.

Saving £110.80 per month increased by 3.5% each year

Source EBI Turnkey software.



Tip #5 - Measurable Impact that shows whilst you are investing your portfolio can have a positive impact.


It is more accessible than ever to be able to invest in line with your ethical values and or sustainable ambitions. The amount of data is increasing not only in volume but in reliability, so much so that one of our selected investment managers is able to measure the positive impact that comes from investing in one of their impact portfolios, compared to the MSCI ACWI index.


An investment of £300k for each year invested would :

  • Avoided 103 tonnes of C02

  • Recycled 9.1 tonnes of waste

  • Generated 163 Mwh of renewable energy equivalent to 60 household needs.



Conclusion


There is no magic wand but plenty you can do to increase your contentment and ability to achieve your goals. Investment is a journey where returns come in small steps and where the journey requires patience, discipline, ongoing evaluation and tweaking. It is also worth saying here that you may want to underpin your investment goal with income protection and life cover if you are dependent upon your regular income funding your investments.


If there is anything here that you want to discuss or find out more about please don't hesitate to leave a comment or get in contact via our contact form.



Resources:

1. Automatic Millionaire, A Powerful One Step Plan to Live and Finish Rich : 2017( revised ) David Bach published by Crown

2. EQ Investors Impact Report 2023 as compared with the MSCI ACWI index.


 

Please note this article is written for financial education and discussion, it does not constitute advice. Investments can go up and down in value as can the income generated from them.


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