05/04/23
News, Resources, Insight and Opinion from Browning Financial Planning
Why you should embrace volatility
05/04/23
Some people consider large fluctuations in their investments and the chance of losses distressing to think about. Others will be more relaxed.
Risk comes from not knowing what you are doing. Price is what you pay. Value is what you get. Forecasts may tell you a great deal about the forecaster. They tell you nothing about the future.
90% of your long-term return will be determined by having the correct Asset Allocation. It is basically the split you choose between equities and bonds. Owning shares (equities) means being a part-owner of a company. Over the long-term this usually means an increase in share price and a rising dividend income. A bond effectively loans money to that company at a fixed interest rate, which gives you a fixed income rather than a rising income and capital growth. We think it is better to be an “owner” than a “loaner”.
In the short term, share prices can move up and down quite dramatically (we call this volatility). Therefore, the greater exposure to shares means higher levels of volatility which means potentially more worry in turbulent times. Bonds are generally added to portfolios to reduce this short-term volatility. This can stunt long-term growth.
The biggest erosion of wealth is the increasing cost of living. A 3% increase in the cost of living will halve the value of your money in 24 years. Investing in equities is your only chance of maintain the purchasing power of your money over a 30-year retirement.
At some stage in your life, you may want/need to start taking a regular income from your investment/pension portfolio. You do this by selling units. After a market drop, you would need to sell more units than normal to maintain the level of income required, which can put severe pressure on the capital value of your portfolio. This is referred to as SEQUENCE RISK.
Over a period of say 30 years, the gains/losses made in the first 10 years have more influence on whether your money lasts than the gains/losses made in the remaining 20 years. Some advisers aim to mitigate this problem by putting you in risk-averse portfolios. We feel differently. As the markets are generally up 75% of the time, we feel it is better to be fully invested but with a cash holding to mitigate this problem.