Keeping things in perspective

The financial industry often has us thinking that a successful investment experience depends on having the ability to predict what markets will do next, confusing investing with speculating.

2018 may have been a disappointing year for equities, but it shouldn’t have been a surprise. Over the history we have available to us, on average, one in three years deliver negative returns.

Since 2009 (the bottom of the market during the credit crisis) global markets have delivered positive returns in eight out of the ten calendar years. Investors have, of late, been extremely lucky.

As humans, we tend to have a strange view of what invested wealth represents and how we feel about it at any point in time. We tend to be happy as wealth (at least on paper) goes up in value and unhappy when we reach that value again, if it is achieved after a market correction.

The true meaning of wealth is having the level of assets that you need, when you need them, to meet your financial and lifestyle goals. In the interim, movements in value are noise, somewhat meaningless and part-and-parcel of investing. When you invest in equities, you should try to avoid mentally banking the money you (appear to) make. In reality, investing is about what we want to happen in the long term, not what happens day-to-day. Remember too that the headline equity market numbers are unlikely to be your portfolio outcome, as most investors own some sort of a balance between bonds and equities.

Investing in equities is always going to be a game of two steps forward and one step back. What equities deliver from one year to another is of little consequence to the long term investor, who does not need all of their money back today.

No one who is honest, knows what will happen in the markets. Today, market prices reflect the aggregate view of all investors based on the information to hand. If new information comes out tomorrow, prices will adjust to reflect the impact this has on company valuations. As the release of new information is, by definition, random, so must price movements be random, at least in the short term. Over the longer term they reflect the real growth in earnings that companies deliver through their hard work, executing the delivery of their business strategies.

In the longer term, investing in the stock market is a game worth playing, at least with part of your portfolio and if you keep things in perspective.