Planning & Philosophy in long-term investing

Posted by Rory Brazil
August 05, 2020
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I had a great conversation in my latest podcast in July with David Walls, Head of Investment Sales in Zurich Life.

Today I’d like to expand on some of our conversation in the area of long-term investing.

The importance of long-term equity investing

We spoke about equities as the asset of choice for long term investment returns and some key differences between the current pandemic crisis and the global crisis in 2008. For example:

This recession is due to a public health crisis whereas past recessions like 2008 were brought on by a financial crisis. Many economies throughout the world were fundamentally strong before Covid-19 hit.
The world economy had too much debt in the lead up to 2008.
There was excessive exposure to property and related debt.
Unemployment figures may be on the rise currently but businesses will re-open when it’s safe to do so and many will operate in more effective and profitable ways. Economists state that we are looking at a U-Shape recovery rather than a V-Shape recovery.

Basically it will take a bit longer but we will recover and probably quicker than post 2008.

Long term investors – Don’t let a recession phase you

In the past century, there have been 15 recessions in the US. In 11 of those recessions, stock returns were positive two years after the recession began.

Investors may be tempted to abandon equities and go to cash when there is a heightened risk of an economic downturn.
But research has shown that stock prices factor in expectations of a recession and generally have fallen in value before a recession even begins.
The average annualised return two years after the onset of these 15 recessions was 7.8%.
A $10,000 investment at the peak of the business cycle would have grown to $11,937, after two years on average.

Recessions understandably trigger worries. But a history of positive average performance following a recession can be a comfort for investors wondering about sticking with stocks and their plan.

The keys to a good investment experience

In most endeavours, there are things you can control and things you cannot. That’s true in life, in business and with investing. The good news about investing is that markets have rewarded investors over the long term. But over the short term—as anyone who has paid attention to markets knows—markets will go up and down.

Things You Cannot Control

The Random Performance of Traditional Fund Managers

Few things have been studied as extensively as the performance of professionally managed funds. While the results indicate that some managers have good track records, there are far fewer of them than you would expect by chance.

What does that mean to investors? It means that even after analysing all the data, you cannot separate skilled fund managers from lucky ones. And if you cannot identify superior managers after the fact, how can you identify them in advance? Based on the overwhelming evidence, there is no magic to investing.

The Uncertainty of Markets

Throughout their lives, people must continually deal with uncertainty and make life choices. You make these decisions without knowing the outcomes. You look at all the possibilities, and then you decide.

Much of the financial services industry is geared toward making people think they can eliminate uncertainty in investing. However, the future is unknowable. The best approach to dealing with uncertainty is to make informed choices through sound Financial Life Planning, adjust as your needs and objectives change, and be comfortable with the range of possible outcomes.

Things You Can Control

Developing an Investment Philosophy You Can Stick With

A philosophy serves as a compass to guide you through turbulent times. When you’ve got a compass, it doesn’t take drastic directional changes to find your way. Small adjustments are all you need to stay on course.

In 2009, the US stock market was down more than 50%, which seems to happen about once every generation. A lot of people were stressed out by the uncertainty, so they cashed out. That locked in their losses. The market then rebounded and some of those people who got out of the market may have to wait decades to get back to where they were. It’s unfortunate they didn’t stick it out so that they could have better weathered the storm.

Trusting Your Strategy and Being Patient

Trust involves many different parts. To trust markets, you must understand how they work, which means having a source of reliable knowledge. You must also trust the professionals who are managing your investments, which should involve a clear understanding of what services and expertise you are buying and what you are paying in fees and costs.

Most people lack the knowledge to manage their own investment portfolio. A trusted financial planner can help you figure out your goals, present different ways of forming portfolios, and ensure you understand the possible distribution of outcomes. This way, you can make informed choices about how to invest. Your financial planner then keeps watch over what is happening, and together you revise your plan if needed.

Investing is a dynamic process and a lifelong journey. It’s having a plan and a philosophy you can stick with, considering the range of possibilities, and adjusting along the way. These are the keys to a better investment experience. Stay disciplined, control what you can control, and keep a long-term view on your destination so you can focus on what really matters and enjoy your life.

Thanks again David Walls for your time and input at this important time in our history.