Dear Southwood Clients
For those of you who enjoy your sport, we hope you’ve been relishing the Olympics. Amid the headlines about our great athletic achievements, the current market volatility is also very much in the spotlight. To address this, we’d like to share our perspective.
A News Filter For You
It is sometimes frustrating when news outlets glorify what is happening and ignore the broader perspective. Let’s start with a roundup of recent financial developments:
On face value, it appears that bigger up and down days in markets (or vice versa) are upon us. However, this is not a sign of a broken market—it is very typical of what happens when investors are trying to digest new information quickly. It won’t last forever and won’t get in the way of us achieving your financial goals and objectives.
It is also worth noting the nature of setbacks. They are often a reversal of what has already run a little hot. For example, the Nasdaq in the US (an index of technology companies) fell by over 10% when it hit the headlines but was still up over 10% for the year. We can see a similar pattern across the globe.*
Markets never move in straight lines
One key aspect we’d like to highlight is the benefit of diversification. With equities facing a patch of recent volatility, bonds have offered a ballast. This is by design. The economy and markets can change path, sometimes quickly and unexpectantly, which is exactly why we invest across a range of asset classes that complement each other. Our aim is to pursue a steady path that seeks to maximise returns without taking excessive or unwanted risk.
This highlights the folly of market timing and in particular cashing up during a market setback. In this sense, cash can feel safe but is a poor diversifier amid rate cuts (as its value does not increase, unlike the way high-quality bonds often do) and cash rates can quickly lag behind inflation.
Changes That Can Benefit You
Turning to actions, this could become a great opportunity to add value in the pursuit of your financial goals and objectives. To do that, you will hopefully find the below helpful:
- Don’t try to pick the exact bottom of any market correction – and don’t expect us to either. Markets don’t work this way. As Peter Lynch famously said in his book Learn to Earn, “Far more money has been lost by investors trying to anticipate corrections than lost in the corrections themselves”. From all our analysis and knowledge, the best approach is to stay the course and invest consistently. The key is to understand probabilities and keep your money at work over long time horizons.
- Stay focused on your goals. We have a financial plan in place to help you achieve what is important to you. Please remember that changes in markets are part of the journey to achieving those goals.
- See the positives in this. We’d like to end by sharing a Warren Buffett quote that we love whenever the market wobbles: “Every decade or so, dark clouds will fill the economic skies, and they will briefly rain gold. When downpours of that sort occur, it’s imperative that we rush outdoors carrying washtubs, not teaspoons”. The key here is that volatility creates opportunity. Above all else, we are with you on this journey.
If you have any questions or queries, please reach out!
*Source: Morningstar Direct, from 9th July 2024 to 5th August 2024. Past performance is not indicative of future returns.