Keep Calm and Invest Wisely
Here is an article that I wrote for the Fall issue of REALlife magazine.
On Friday June 24th, the UK voted to leave Europe. That day financial journalists reported that investors in global equities had “lost trillions of dollars”. Since the referendum in the UK, most major global stock markets have eclipsed their pre-Brexit levels and marched on considerably higher. That is, all those “lost” dollars, and more, have miraculously been found again.
The investors who panicked and sold are the only investors who lost money on June 24th and in the following few days. In hindsight they wished they hadn’t. But the urge to flee equities in a “crisis” is very strong and the financial media validates this urge by being perennially biased to the negative, as pessimistic stories appear more captivating than optimistic ones. Most financial stories in the news and on the internet are short-term and sensationalist. It is no wonder therefore that, according to a recent Gallup survey, almost half of the US population owns no stock market investments at all.
Driven by fear
This is a worrying statistic. It shows that almost half of the population may have no realistic plan for beating inflation over the long-term (since 1926 propertyhas barely achieved that). No plan whatsoever for building their wealth and their net worth. No plan for how they are going to generate an income in retirement that they cannot outlive. Sitting on the sidelines with your savings in cash might feel good, but it is a false sense of security and it is always driven by fear.
It is easy to become anxious and fearful when we are faced with things that we don’t understand. However, allowing fear to control your financial decisions is the biggest mistake you can make. Whatever it is that the media is focusing on – Brexit, Trump, the debt-ceiling, rising interest rates – you can’t control these things, they are just noise. And over time, what is absolutely true is that the stock market simply ignores this noise and continues its upwards march.
The best thing is to focus on your personal economy and ignore the global one. As Carl Richards explains beautifully in his sketch, focus on the things that matter and the things that you can control. The health of your personal economy matters and you can control it by how much you spend, how much you save and most importantly, how much you invest. Investing your money is the only way to make it grow.
Ignore the noise
In order to grow your money, you have to accept the waxing and waning of the market. You have to accept the volatility. Volatility can be painful over the short-term, but over the long-term disciplined investors can use it to their advantage. An investor who ignores the noise and continues with a plan of continually buying stocks will benefit enormously from the volatility.
Whilst traditionally volatility has been labelled as ‘risk’, it is only such if you have the wrong response to it. All those investors who responded to Brexit on June 24th by abandoning their long-term financial plan and selling their stocks now find themselves sitting on the sidelines in cash, waiting for a better time to get back in. That may or may not come.
Focus on your goals
Investors receiving great financial advice were able to ignore the ‘Brexit noise’, focus on their goals and stick with their financial plan. They know that there will always be something. The media will always create a reason for panic, a reason for us not to invest. They realise that there are better things to do with their time than to try and position their portfolio for the next unknown geopolitical event. With their competent and compassionate advisor they are able to continue to build wealth for themselves and those that they love.
*according to the Case Shiller index.