We are now past the end of the third quarter in what continues to be an eventful year for not only our health, but financial markets and the economy as well. In light of all that investors have been through, we thought it might be worthwhile to briefly summarize where we’ve been this year and the prospects for the period ahead – and also to highlight some lessons we are consistently reminded of as investors.
Where we’ve been
In mid-March, listening to the news it may have felt like the world might be coming to an end – talk of a return to a Great Depression like economy dominated television and social media. Understandably, financial fear was rampant – and stocks responded to these nightmarish scenarios by hitting the lowest levels in years.
Although no one knew it at the time, that turned out to be the stock market bottom. Since then, we’ve seen the economy move back from the abyss and as a result, we’ve had a strong recovery in markets from their bottom at the end of March.
Here are a few lessons from the last twelve months:
- We were reminded of just how volatile stocks can be and the importance of true diversification and proper asset allocation in an investment plan.
- We have learned that re-acting to the media is a recipe for disaster. A Financial Advisor should help you maintain patience and faith in the future. Quality investments have provided success to long-term investors and it is no different this time around.
- Investors were also reminded of the need to focus on what they can control – That is to understand cash needs and then apply appropriate asset allocation to fund those needs. This is key to a successful investment plan.
- Finally, we were reminded that in today’s world, we need to expect the unexpected. Although events always change; the driving forces behind financial markets (Fear and Greed) remain intact. Advisors and Investors who can manage their emotions will continue to be successful over an investing lifetime.
The outlook going forward
A year ago, investor behavior was characterized by rampant optimism. The North American markets had hit new highs and any concerns were set aside as minor annoyances. By contrast, six months ago the market was overwhelmed by absolute pessimism.
Today, the market is somewhere between those two extremes and many investors can be characterized as cautiously nervous, highlighting the importance of a trusted financial advisor to help develop and implement an investment plan.
As a general rule, a certain level of healthy anxiety is positive – what gets investors in trouble is an excess of either optimism or pessimism. The good news is that there are still excellent opportunities for investors who are prepared for short term volatility. Most investment managers say they are still finding very good value – not to the extent that they did earlier this year, but still well ahead of what they would have seen a year ago. There are also a number of reasons to be optimistic on the future. We live in a world that is rapidly becoming more free, clean, healthy and peaceful. Humans innate ability to problem solve and innovate has seen the world continue to become a more efficient place, with global income levels and life expectancy continually on the rise.
Let us close by talking about volatility in your investment plan;
In 1907, U.S. financier J. Pierpoint Morgan singlehandedly averted a banking panic among U.S. investors. Later in life, someone asked him his best guess on the direction of financial markets. His answer: “They will go up and they will go down.”
Over one hundred years later, that’s still the best answer to someone looking for a short-term market forecast. As Financial Planners and Advisors in Cornwall and surrounding area, we strive to help educate our clients that while some financial headlines may sound convincing, no one can truly predict market movements in the immediate period ahead – all we can do is understand clearly how much short-term volatility we can live with, adjust our investment plan accordingly, and stay focused on the horizon as we deal with the rough waters. No one likes volatility … but for most of us it’s the necessary price to arrive at our ultimate destination.