We often speak about the GAS principle with our clients, and it is pertinent in markets that are volatile, as we have seen this year.
The financial markets have been somewhat complicated and contradictory this year. When financial markets are spoken about in general news media, they mostly comment on broader markets, or indexes. When we look at the S&P500 for example, which is an index of the largest 500 companies on the US stock market, its performance can be quite misleading. Whilst this index has grown this year, it has been almost entirely down to around 9 stocks that have out-performed. By extension, this means that around 491 stocks have not grown as strongly, and so if you were holding any of those, you might be wondering why, if the stock market has supposedly gone up, why your holdings have not.
This can lead you to asking more questions about your investments. Whatever is happening in the markets, whether it is with cash, property, share, fixed interest, commodities or any other sector, we always advise that you should only make investment decisions that fit with your goals and objectives. That is why you are investing in the first place- to achieve a goal. Short term movements, news and other noise should not impact your investment choices.
When it comes to making investment decisions, because you are re-aligning your portfolio to your objectives, or for another reason, it is important to remember the GAS Principle.
GAS stands for Growth, Access, and Security.
The GAS principle means that you can only choose two of these when making investment decisions, because there is an inherent tension and trade-off between these factors.
Growth– if maximising returns is your most important objective you may focus on this. Decisions you make will be based on returns to grow your investment.
Access– if by contrast, it is more important to have access at any point in time this may influence how you manage your money.
Security – to provide security for an investment, to make sure it never goes down in value, you will make different decisions than if growth was your focus.
If growth is most important to you, would will likely either forego access or security. Growth comes with short term volatility that reduces over time. This means that whilst you may maintain the right to access your money, if you do, you have to give up the security that it may go down in the short-term.
Conversely if you don’t want to forego that security, you can invest for a longer term, and trade-off access.
If you want security and access, then you will have to forego growth.
Let’s look at some examples:
- Cash in the bank– for the last decade, up until this year, it was difficult to get any return from money in the bank. That has changed this year, but the returns on offer are still low, and in most cases, lower than inflation. That means, adjusted for inflation, you are not growing your wealth at all. But, in following the GAS principle, you are prioritising security (the security of the banks), and access (if your money is at call), and giving up higher growth. You could tweak this with money in the bank, by taking on a fixed term deposit. Then you will give up access for the duration of the investment, for slightly higher growth.
- Pensions– when you invest in pensions, you are making a long term investment. The government regulations of that country will define when and how you can access these funds in the future. You are therefore, giving up access, because access to your pension funds is low or non-existent. You will however have the security of pension regulations, and higher growth potential, because of the long term nature of the pension, and indirectly if there are tax-advantaged treatments to the pension.
When it comes to your investments, always place your objectives, what you are trying to achieve, at the centre of the analysis, and when considering what options to take, ask yourself what is most important in the growth – access- security triumvirate, and remember you can only pick two!