4 consequential ways your “second 50” might look different to previous generations (Copy)

As we rapidly approach the end of 2022, in what has been an extraordinary year on global financial markets, we are looking at what expats in Europe are asking us about and what they want to know.

These are the 2 most asked questions and our responses:

1. Has the market finished falling?

We know that markets move in cycles, that they go up and down, but over time trend up, that is, markets increase in value in the long term. This is hard to remember in times when markets fall, which they did in the first half of 2022.

When clients ask about the falling market, it is important for us to understand what is behind the question, and for you, this can be helpful in how you respond to volatile markets.

The short answer is that we cannot say with certainty what the markets will do tomorrow, however, we do have a knowledge of market cycles and factors that influence investment performance. This drives some of our tactical positionings when it comes to providing investment advice and managing portfolios. There are different scenarios that can influence the best course of action for how you respond to volatile markets and how we answer this question.

If you:

• Have a long-term focus and no need for capital soon, but are anxious

For the person that is invested with a long-term focus, even in volatile markets, can become concerned by market volatility, and it is often at a market’s nadir when our ability to withstand volatility becomes exhausted. If this is you, it is important to consider your long-term objectives. The key assessment for you is whether your investment is still aligned with your objectives and whether you are still on track to reach your goals. This is what should drive changes to strategy.

What we do know for certain is that markets inevitably recover. Being focused on your long-term goals and ensuring your investments are still aligned with your goals, can leave you better placed to benefit when the markets do recover.

It is also useful to differentiate between volatility and risk. Volatility is markets increasing and decreasing in value from one day (or month or year) to the next. This means your investment or other assets such as a property can be worth a lesser amount now than it was in the past. But, it can recover in value and in the future be worth a higher amount. Risk, in contrast, is the potential for that asset to be worth zero in the future, for you to actually lose your asset. In diversified investments, you incur volatility but you have very low exposure to risk in this definition.

In times like this, if your investments are diversified, and are still aligned with your goals, we recommend focus and patience. To quote one of the most famous investors, Warren Buffett famously said that “the market is a device for transferring wealth from the impatient to the patient.” What he means, of course, is that if you get exasperated and sell your investments in down markets, it is the buyers of those investments when you are selling that will make good returns. This is a lead in to the second perspective.

• Seeking opportunity

In contrast to the above position, an investor will sometimes consider market volatility as an opportunity. The approach may be similar to the above but from a different perspective. It can be true when looking at a market that has fallen in value, that it can be viewed like a sale at a store, as prices are discounted. Buying at a lower market point can be an opportunity for growth when markets recover.

However, you need to consider your timeframe, your objectives, and your risk profile. You also need to be aware that you might not get the timing exactly right as the markets may fall further before recovering. Aligning your actions and responses to the market with your goals is ultimately what you are trying to achieve.

• Need access to funds soon

This is a different scenario and tends to be the exception, not the norm. If you need access to your capital in the short term, you may not have time to ride out the volatility. In this case, you need to speak with a professional adviser and determine the best course of action. Ideally, you should maintain the capital that is needed for short term use outside of investments with short term volatility, however, we also understand that your circumstances may change. 

2. Is it a good or bad time to invest?

We are frequently asked this question. Our answer is consistent across market cycles: the best time to invest, for you, is and should be driven by what you are trying to achieve and not by what is happening in the markets.

In that sense, whether it is a good time depends on your situation. More broadly then, by extension, it is always a good time to invest if it aligns with your goals because markets do go up over time, just not in a straight line. And, it is better to start investing sooner rather than later.

There are several examples of investors that decided to wait for a market event before investing. Sometimes that event doesn’t happen at all. The common factor seems to be that these investors missed opportunities. If you are waiting for signs of market growth, the market will invariably have already gained before you decide to start meaning your potential for growth is reduced. Furthermore, while waiting you are risking erosion from inflation.

In summary, the focus should always be on the end goal. How you invest should be a reflection of the best course of action to get you from where you are to where you want to be, with the appropriate level of volatility exposure. Dynamic portfolio management and good advice can steer you and your investments to help you get there.

If you want to discuss your financial situation, and get advice or a second opinion, contact the Black Swan Capital team at info@blackswancapital.eu.