This post is inspired by a recent conversation with a friend. Like so many Millenials, her primary financial ambition is to become a homeowner.
However, unlike many of our contemporaries, she has the means. Cash for a deposit is available; a mortgage has been agreed in principle; an appropriate location has been identified. She’s fortunate to be in this position — but, she hasn’t taken the ‘plunge’; and, curiously, appears to be in no hurry to join the ranks of the homeowners.
When I called her out on her hesitancy, she took a deep pause and declared, with an air of gravity: “Brexit”. And, during the ensuing discussion, she cited the current climate of instability.
Ever since, I’ve wondered whether there are others that are in the same boat. Are there more like her — financially mobile, ambitious, savvy – but trapped in Brexit-induced limbo? I hope not. Here’s why:
You can’t predict the future
A vibrant industry has emerged in Brexit predictions. Columnists, economists, politicians, laymen; it is not exactly difficult to source a wealth of opinions on the future of Brexit Britain.
Michael Gove attracted a healthy dose of ridicule during the referendum campaign when he articulated a mistrust of “experts”. But, he grasped the kernel of a valid point — very few economists were prepared for the crash in 2007; a vanishing minority of political commentators foresaw the prospect of a Trump presidency; and, even the Chief Economist of the Bank of England now talks of economists being “to some degree in crisis”.
That’s not to say that expert opinion is necessarily to be doubted. But the reality is that the modern world is populated by a confusing web of complex and interrelated systems. And, as time progresses, technological, scientific and social advances accelerate both the complexity and interconnectedness of our systems. So much so that our ability to forecast the future with meaningful accuracy races closer and closer to zero.
And, even if it were possible to accurately predict overarching macro-trends, those rare minds that are capable of doing so probably aren’t earning their crust in the media — they will be far too busy making millions on the global markets.
I’m not saying that you shouldn’t take a view on these matters — you should, and will, hold an opinion. But bear in mind that the smartest people are often the ones that know they can’t predict the future. And, while we’re at it — use rationality with extreme caution. Markets are complicated, and imperfect ecosystems; they are highly vulnerable to groupthink, and subject to outright manipulation. They can, and will, behave irrationally. Sometimes they will behave irrationally for much longer than you can afford to lose your money.
Appreciate the opportunity costs of staying still
Yes, there will be some situations where the economic landscape is so extreme (or, perhaps, it will become so extreme) that not investing at all becomes acceptable. And, sure, if your understanding of the macro-markets is seriously sophisticated, and you sincerely believe that you can actually detect these abnormalities, go ahead and sit out.
For the rest of us, time is an extremely valuable commodity. Sensible investors understand compounding — the process whereby returns accumulate on your returns. Over time, this adds up to exponential growth, as Tony Robbins’s simple example demonstrates.
Imagine that you invest $300 per month between the ages of 19 and 27 and nothing thereafter ($28,800 in total); if the market behaves in accordance with historical trends, your fund will have grown to $2 million by the age of 65. Your friend, however, waits until he is 28 to invest, and like you, sets aside $300 per month; this time, until he’s 65 (contributing $140,000 in total). Despite investing considerably more than you, his fund at 65 will be nearly $300,000 shy of yours.
Simply put — the longer you wait to invest, the smaller your window for compounding will be.
Invest for the long term
Timing the market seems attractive enough — it doesn’t require a great deal of critical thought to appreciate the risks of entering a market on its downward trajectory.
The only problem is that this is pretty hard to pull off— firstly, and partly because markets are to some degree irrational, your capacity to do so (certainly as a non-professional investor) is limited. In fact, overactive traders tend to mistime the market to frequently that the average investor in the UK underperformed basically every routine financial instrument (think: cash, bonds, etc.) between 1994 and 2014.
Secondly, and arguably more importantly, remember that market dips tend to be transitory. Yes, there are exceptions — and this is where the importance of diversification comes in — but it is surely unrealistic to expect long-term, structural, decline in the established markets.
Examine the historical performance of property, equities, financial instruments; and, the story is consistent. Yes, there may be some turbulence, but the overall path trends upwards. And, the best way to exploit that trend is to adopt a long-term approach.
As JP Morgan’s report demonstrates, if an investor stayed fully invested in the S & P 500 between 1995 and 2014, they would have expected a 9.85% annualised return. However, if they had missed just the ten best trading days in that 19 year period, the annualised returns drop to 6.1%.
Here’s the kicker — six of those ten best days occurred within two weeks of the ten worst days.
Holding your nerve, and adopting a long term mindset, means that you will benefit from all of the best days.
You’ll notice that I haven’t delved into the specific and mechanics of Brexit itself. That, of course, is the point. The best response to Brexit is, in my view, not to “respond” at all.
If the prospect of home ownership fills you with dread (which is, by the way, a perfectly valid position to hold), then don’t purchase a home. You should be moulding your personal financial plan around your personality, not Brexit.
Yes, the principles outlined here are basic — but, they work. And, they work well. They worked before Brexit; and I’m confident they will work afterwards, too.
The opinions expressed here are given in a personal capacity only — they do not constitute investment advice. If you would like to speak to an authorised investment professional, I can recommend a good one.