A Comment on Recent Market Volatility

Markets have been very up and down in the last few weeks so I want to send you a quick note to assure you that you do not need to panic!
The reality is when we build your investment and/or pension portfolio we “test” your capacity for loss. What we do here is we go back in history to the last worst market crash or temporary decline as I like to call them. At present the last worst is 2008. If this temporary decline turns out to be worse than 2008 then we will use 2020 from now on. When we test your capacity for loss, if your finances can not survive another 2008 then we adjust how much of your money we put into shares at the outset.
Another 2008 or worse happening isn’t something we think might happen, it is something we know, and we expect to happen and that is why we build it into your plan. We expect every 3-5 years that we will have a temporary decline. When they do happen, if you are invested 100% in shares at the time (most investors with Prosperous are invested 60% in shares and 40% in bonds) then the fall you can expect on average is -31%.

2008 saw a 100% share portfolio fall by 54%. In fact, in 2008 if you invested €100,000 into just shares the day before the crash happened, 18 months later your money would have been worth €46,000. However, on the 10th anniversary if you had of stuck with the mantra of “invest and forget” then your investment would have grown to over €200,000.
The stats are very clear, when temporary declines happen, 80% of them will have fully recovered within a 3-year period. If you are invested in a 60/40 portfolio then over a 5 year period you have a 99.6% chance of achieving a positive return.
Since the last crash we have had double digit falls in 2009, 2010, 2011, 2012, 2015, 2016, 2018, 2020, it is not actually unusual. What is unusual is what causes the temporary decline. In this instance it is a virus. The good thing about that is the fact that when they find a cure all the uncertainty disappears. Stock markets don’t like the unknown, in fact stock markets overreact to the unknown. Right now, some people are saying that the markets have built in the worst case scenario and any improvement from that will result in a bounce.

These ups and downs are all just noise, if your investment is setup correct, which yours is, then you invest and forget and ignore this day to day stuff. You are not a day trader. Some people wonder should we move to cash for a little while and let it all calm down before investing again.

No! You should not do that!!!!

If you decide to move to cash and ride out the storm firstly you are doubling down on your decisions and therefore you must get two things right for it to work. First you have be to be right that there is more bad stuff to come that will negatively impact the markets meaning the markets will fall further. But second you must time the bottom of the market to time your re-entry correctly.

People often say “I am not worried about getting back in at the bottom I will just wait until it is rising again and then I will put my money in”. Best of luck with that, the best days are often at the start and you often get a couple of false starts, markets are not linear. Missing the best days is damaging.

If you invest for 40 years, and leave it alone, €1,000 will turn in to €11,510 over the period. But say you get spooked and pull your money out for 1*24 hour period during the 40 years, you only miss one day and that day turns out to be the best day. Instead of your €1,000 turning into €11,510 it will turn into €10,315. If you do that 25 times and miss the 25 individual best days, then your €1,000 will only turn into €2,894.

My point is moving out of the market or adjusting after the horse has bolted is not the right thing to do. You won’t know if you have already reached the bottom, you won’t hear a bell ring when you do reach the bottom, you won’t know when to get back in and you will most likely miss the best days.
Don’t try and time the market, invest and forget.

The positive things you can do are you can invest new money in the market right now, even if there is more of a fall to come (we don’t try and time the market!) ultimately prices are cheaper now than they were before this temporary decline started.

Secondly if you are a regular investor all of this market movement is great for you because you are taking advantage of euro cost averaging, in other words you are buying your shares at different prices as the market moves up and down and therefore it is the average cost that becomes important.
Don’t be concerned, we expected this to happen, we have built it into your plan, we have tested your finances, the cause is different but the market reaction is not, your investment is set up properly. Invest and forget.

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