Welcome to the May edition of the Financial Independence & Dignity email
Good Evening
I hope this mail finds you and your family well?
Despite my youthful appearance, I have worked in the investment business through three bear markets, (2001/02, 2008/09 & 2020) and lived through a few more. A 20% decline in the market is what officially classifies a bear market. That being said, every single year between the three aforementioned years, there have been corrections where the markets have been down intra year as well.
The latest downturn has seen the MSCI World Index of shares decline 7.2% in February and a further 13.35% in March. This is testing, to say the least, even for the most stoic investors.
You try your best to ignore the current value of your portfolio and the surrounding noise, but there are many competitors for our attention. The media and Joe Duffy are clamouring loudly, the bank are promoting the benefits of some "guaranteed" product, the insurance broker has an amazing fund that has "downside protection" and/or "tactical asset allocation" (these phrases mean closet market timer - beware). It is easy to take ones eyes off the goal and plan.
I don’t profess to have any ability to predict market movements over the short term. But what I do know is, that the greatest risk to any investor during my lifetime has not been that they were invested during these bear market periods. No, their greatest risk was that they were out of the market for its far more frequent advances.
Those who moved to cash would have crystallised their loss. Steep market losses are often associated with rapid recoveries; April brought positive returns of 10.96%. Those who followed their long term financial plan and stayed invested, while having felt the pain have at least stayed on the road to financial independence and dignity.
As long as you have a financial plan, then the investments you hold should always serve that plan and short term volatility shouldn't impact that. The financial services industry equates risk with volatility. Very often the periods of highest volatility are the ones of greatest opportunity; this is really only obvious to those with a long term plan.
I have only been referring to the capital growth of the stock market thus far. There is of course a very important income element to the growth you get when investing in stock. And for retirees, arguably this is even more important.
Think about this; at retirement your whole financial life comes down to one question, will your money outlive you, or will you outlive your money? Most professionals I deal with are unsure what retirement outcome they will get - in part as they are oblivious to this critical question.
A couple in their 60s has a joint life expectancy of 30 years. Based on the last 30 years, the cost of living for these clients will go up 3.5 times. Something that today cost €1 will cost c.€3.50
If you haven't got a plan to increase your income as much as your living costs go up during that 30 year retirement, then you may in effect have a plan for running out of money.
My professional aim is to help people make the right kind of plan to avoid this last scenario. It’s a much less complicated conversation than you might expect or indeed that that the industry wants you to believe.
Since 1960 - to pick a time frame that takes in the lifetime of most people who are not retired yet - CPI in has compounded at close to 3%. The income generated by the stock market, as measured by the S&P 500, has compounded at 5.9%!
The S&P 500 is made up of the largest, best financed, most profitable companies in the US. Taken as a group, these companies have been raising their dividends at something close to twice the rate of inflation for as long as you and I have been alive.
These are two statistics. Here is one thought. - Rising dividends are an important way smart people have kept their retirement incomes growing well beyond their living costs. We look to capture this through the funds and ETFs that we use in your portfolios. …onto the top reads.
Top Reads
"The Folly of Waiting for the Bottom - what is a long-term, goal-focused investor to do?" A great read as to why trying to time markets is the road to ruin. (5 mins) Nick Murray
“Diversification can make you feel like you’re running uphill with a weighted vest on during a bull market.”
It’s only during a bear market that you realise its importance as a form of risk management. (3 mins) Ben Carlson
"At times like this, the clever cocktail crowd might view such optimism as naïve and unsophisticated. But guess what? In the financial markets, optimism—or, at least, prudent optimism—invariably wins" (4 mins) Jonathan Clements
As always if you wish to discuss anything, or I can be of any help please call me. All of my meetings are now being held remotely through Zoom and my Online Diary is available here.
This too shall pass.