Investing: a cool head in a crisis is more than just ‘positive thinking’

As financial planners, we often remind clients that staying calm helps avoid making rash investing decisions. In the current climate, this can feel especially challenging. Here’s how you can stay focused and make well-informed decisions about your long-term financial goals.  

“It’ll all be ok in the end, if it’s not ok, then it’s not the end.” 

This much-quoted example of positive thinking often gets wheeled out when times are tough. It’s supposed to provide reassurance that when you persevere, things get better.  

But if you’re worried about how the conflict in the Middle East has impacted your pension and investments, or the general state of the economy, someone telling you to ‘keep calm and carry on’ (another cliché) with no evidence to back it up might feel like being told to bury your head in the sand. 

Financial planners like us offer something more than just positive vibes. As financial planners, our role is to provide more than positive thinking – we provide perspective and structure. 

How keeping a cool head during a crisis is more than just ‘positive thinking’ for investing

The conflict involving Iran is impossible to ignore

Since February, when the US and Israel began trading air strikes with Iran, oil prices have soared to above US$110 a barrel. It’s had a dramatic effect on the global supply chain and equity markets – especially those in Asia, which are heavily reliant on oil and gas from the region. 

The conflict can’t be shrugged off lightly. It’s clear there will be lingering consequences.  

In the UK (which already has its own struggles), it looks like the fallout will mean interest rate reductions are put on hold. Even worse, depending on what happens with inflation next, rates could even start to rise again. This means higher mortgage rates, less disposable income, and slower economic growth.  

This has been reflected in equity markets. The FTSE All Share has fallen sharply since the conflict began. It fell 8% between 27 February and 19 March, reversing gains since the beginning of the year. 

Reasons to remain calm

It’s tempting to forget about that long-term picture when the present feels so uncertain. Many investors become tempted to make rash decisions – such as pulling out of the market and into cash – but this can have long-term consequences. 

A crisis needs a cool head, so here are three things to consider when it comes to successful long-term investing: 

Cash returns often lag equities over the long term

The Bank of England could very well start to put interest rates up again. While rising rates are bad news for your mortgage, they could also mean higher returns from cash savings. Three years ago, when interest rates were at their peak, it was possible to find variable-rate account offerings and returns that made cash seem like a risk-free alternative to investing. It’s possible we could return to this scenario.  

However, while these returns might seem attractive, the advantage doesn’t last long. 

According to the annual Barclays Equity-Gilt Study, which looks at historical asset class returns since 1899, the probability of UK equities outperforming cash for any two-year period is 70%. For 10 years, that probability shoots up to 91%.  

In the long-term, equities tend to fare better.* 

Changing lanes upsets your long-term earning power 

One of the biggest mistakes investors make – one we’ve discussed many times before – is trying to time the market. Investors try to sell out of the market (switching out equities for cash) when performance drops, then aim to buy back in when things pick up. Research shows it rarely works in your favour.  

• Firstly, guessing when to make that switch is a dangerous game. According to research from JP Morgan, over a 20-year period, seven of the market’s best days came just two weeks after the worst ones. Missing out on those best days significantly reduced overall returns. 

• Secondly, staying invested means you benefit from the power of compounding. Earning interest on the interest already accumulated drives even greater levels of investment growth. Switching to cash interrupts this compounding (and can incur higher transaction costs each time you trade). 

Equities tend to bounce back after conflicts

Of course, conflicts such as the current escalation in Iran do have a negative impact on investment markets.  

But the evidence shows this effect can be surprisingly short-lived. Research from Carson Group, reported here by Citywire, analysed the US market following 19 major conflicts dating back to the start of World War Two. In seven out of 10 cases, markets had recovered within one year.  

Uncertainty is a natural part of investing  

Finally, let’s look at uncertainty. The CBOE Volatility Index or VIX – often known as the ‘Fear Gauge’ – uses trading data on US futures to assess volatility in the US equity market. A very low number suggests total calm (indeed, complacency). As the score increases, this suggests investors are starting to panic. 

Investors are definitely more anxious currently. The VIX has crept up since the start of the year, showing that there is more volatility in the market. However, events such as the pandemic and global financial crisis saw much higher episodes of investor anxiety.  

What message can we take from this?

We’re not saying investors have nothing to fear. Instead, the overriding message is that volatility, and therefore uncertainty, is a part of investing (and in fact, those periods when volatility spikes can sometimes create opportunities for investors). 

So, how can we help?

Staying calm in a crisis is more than just positive thinking or just shrugging your shoulders and saying, “this too will pass.” That gap, the one between “total calm” and “blind panic”, is where financial planning can help. 

Here’s how a financial planner can help set your mind at ease in times of market turmoil. 

• We help you keep your investments diversified. It’s important to stay in the market, but what about your asset allocation? Can you benefit from rebalancing between equities, bonds, and other asset types, such as alternatives? 
• We help you keep your discipline. Investors who stay disciplined tend to be rewarded. With the use of cash flow modelling, we can show you the trajectory for your savings under different scenarios. This helps you stay more confident in periods of market volatility.  
• We help you focus on your goals, not an absolute value. What are you investing for? Is it a comfortable retirement, are you financing a move abroad, or just having more time to spend with family? Have your goals changed? 

If you’re worried about your financial plans in light of recent events, or at any time, we’re here to help. Please get in touch with our team.

*Past performance is not a guide to future returns, but long‑term data highlights the importance of staying invested.