Market update – long term investing

I have in previous updates highlighted the importance of having a short and a long term financial plan and I set out below, given the Ukraine uncertainty, the benefits of remaining invested.

 Why long-term investing matters

Investing for the long term gives your money the greatest chance of growing in value. But this means keeping calm during periods of significant stock market volatility – and remembering that, as history shows, markets typically recover. Here are four reasons why investing over the long term is the wisest strategy

Time in the market matters

As the old investment adage goes, it’s time in the market – not timing the market – which is key to returns. By delaying, or cashing in your investments, you risk missing out on the best days in the market. The global economy has endured plenty of adversity over the decades, and yet the stock market has continued to climb, given time. The chart below shows that if you invested £100 in the FTSE All-Share in January 1997, it would have increased in value to £278 by January 2022. This is on a ‘total real return’ basis (combining share price changes and dividend income, and adjusting for inflation) and before fees.

Conversely, if you had put £100 in a cash savings account, it would have grown to just £131 after adjusting for inflation.


Source: Brewin Dolphin / Refinitiv Datastream 1 Based on Bank of England base rates

Neither simulated nor actual past performance are reliable indicators of future performance. Performance is quoted before charges which will reduce illustrated performance.

2. Compounding matters

Compounding is extremely powerful when it comes to investing. Albert Einstein described it as the eighth wonder of the world. It is, simply, earning returns on your returns. For example, somebody earning a nominal return of 5% net of fees in year one would see their investments grow by a compounded return of 63% after 10 years. After 20 years, this rises to 165%, and over 25 years it balloons to 239%. This demonstrates the cumulative effects that compounding has on capital. This is the area that we focus on in your review cash flow forecasts.

3. Risk matters

Spreading your money across different asset classes across the globe, including equities, bonds and cash, can help to reduce the impact of volatility on your investments’ overall performance. This is because different assets tend to be negatively correlated, which means they will not usually react in the same way to sudden economic shocks.

4. Holding your nerve

When markets are falling, you might be tempted to cash in rather than endure more falls. But while this is a natural inclination, doing so only serves to crystallise losses. Although periods of volatility are worrying, they can sometimes present opportunities for investors. For example, sell-offs could offer the chance to buy shares in businesses at cheaper valuations. Saving for retirement via pension contributions and particularly via salary sacrifice can save all your tax and national insurance that otherwise would have been paid in your net take home pay.

Time in the market

As the old investment adage goes, it’s about time in the market – not timing the market. This means committing your money to the markets and leaving it invested – for at least five years, ideally longer – rather than waiting for what you might perceive to be the best time to invest. The longer you invest, the greater your potential for making a profit. It doesn’t typically pay to hold off on an investment decision if you’ve got time on your side. After all, it’s impossible to know when the bottom of the market will be reached. There are plenty of factors that will impact this, and there might be further short-term pain. Yet trying to time the market, or cashing in, risks missing out on some of the market’s best days.

Managing risk

Your returns will be subject to stock market movements. But you can reduce volatility by placing your money in a broad range of asset classes across the globe. No matter when you invest, losses to one investment could be offset by gains to another because they won’t react in the same way to economic shocks. Over time, this could reduce the impact of volatility on your investments’ performance.

Taking action

Periods of uncertainty are undoubtedly unsettling. Yet if you’ve no immediate need for your spare cash, and some set aside for emergencies, investing for your long-term goals could give you some sense of control over your financial future to drive towards the best retirement outcomes.

Hopefully a diplomatic solution can be achieved in the Ukraine which should have an immediate positive reaction in global stock markets.

I look forward to discussing matters further at our next review meeting.

Kind regards

Posted in Blog.