I’d like to share what’s on my mind and to make sure my clients remain grounded by the principles of a good investment as we continue to learn to navigate the difficulties of COVID, lockdowns and what the world will look like as we start to move forward.
Investing is an exercise in optimism. Every time we purchase an asset, we’re demonstrating confidence in the future – that companies will grow their profits, borrowers will repay their debts and governments will allow capital to move freely around the world. Without optimism, there could be no investment markets or entrepreneurship. However, too much optimism can be dangerous for investors as it can alter our behaviour, leading us to take too much risk without being adequately compensated.
What we’re looking for, then, is balance: to be neither alarmist nor greedy. On the plus side, we’ve got ultra-low interest rates, high savings rates, and economic recovery – all pointing towards continued demand for growth assets and a reason behind the strong investor interest. But on the downside, it has become apparent a record number of “new” investors are entering the scene with high expectations of quick gains.
This was confirmed via a recent by the asset manager Natixis, who found that investors currently expect a return from equities of 14.5% above inflation (keep in mind, this was a large study of 8,550 people). If we assume long term inflation is 2%, this equates to around 360% over the next 10-years. While such a return is not impossible, the odds are only around 7.35% according to Morningstar calculations. Even more strikingly, this probability falls to just 0.36% when the starting point is at an all-time high like today (a 1 in 277 chance).
The key message is, in times like today, is to make sure we keep our investing ego at the door. We want to have the smartest minds on our team and invest with conviction, of course, as that is where intelligent gains are made. In truth, we’ve all made some very healthy gains and they have contributed considerably towards your financial goals. Even better, staying true to your risk tolerance and making decisions that are appropriate for your investment timeframe has provided tangible rewards.
So, we’ll continue to cheer gains, but remember that risk means more things can happen than what will happen. At different times, different factors perform well, and we work with you to facilitate a smooth and (hopefully) profitable journey to your goals and beyond.
I hope you find this helpful. If you would like me to elaborate further, we’d be delighted to chat.
Morningstar Investment Management calculations, Robert Shiller data, from 1/1/1881 to 31/7/2021