Hi all, having a quick conversation with one of my clients (no mention of names you know who you are! :0)) and we started having the conversation about drops in value, Panic selling etc. Essentially trying to “time the market” rather than “time in the market” There is one right way and one wrong way where many a clever person has tried and failed!
Then it dawned on me, Education allows you to make key and critical decisions, That’s not news to us – Many of you see this as a big reason why you have me as your financial adviser.
But the thing that might be new is that THE EDUCATION is maybe not all about teaching you new things, it’s perhaps equally about helping you unlearn things that just simply aren’t true. There is no bigger one to start with than Risk v Volatility.
Many people confuse the two and they couldn’t really be at further ends of the spectrum if they tried, for volatility is represented by a temporary decline (or increase but for the purposes of this lets say a decline, As no one is going to be unhappy with an increase in value of their investment are they?!?!) in the price of underlying assets, where as risk would represent the permanent loss of overall value in an investment.
With this in mind we have seen THREE BIG CRASHES in the markets since the year 2000, 2 of over 50% decline (2000 and 2008) and one of over 30% (2020), Crashes of 30% happen around every 5 years historically – Volatility NOT Risk – Why? Because after every single event in the history of time these crashes have been recovered from and markets have recovered – Every-single-time – And continued to go on to form new highs – The S&P was approx. 221 in Jan 1951, 70 Years later, and as of Jan 2021 its stands at continued 3,751 in Jan 21 – a 1697% increase – despite ALL of the major events and Crashes since 1951 almost all bar one post world war 2 events.
Now here is the kicker, Volatility can turn into Risk if you let it, If you withdraw from the investment or if you panic sell, this makes the temporary reduction in price become a permanent loss in value. If you have funds that you need in the next five years it doesn’t make sense to have them 100% exposed to equities, however over the long term (5+ years) not having a healthy proportion of the portfolio in growth assets (equities) is akin to concrete boots as you jump in the sea. With these assets acting as a drag on all the good work done by your equities.
I recall reading about Warren Buffet, The most successful investor of all time. He was (and still to be fair) a majority share holder in Berkshire Hathaway. Let go back to 19 Oct 1987, Black Monday, One of the if not the worst trading days in the history of the markets.
At the start of the day Berkshire Hathaway stock were values at $3,890 each, at the end of the day price per share had dropped to $3,180 – For Buffet this was a reduction in share holding value of $342,000,000 IN ONE DAY.. $342 MILLION…
The total sum of all losses recorded by Warren Buffet on that solitary day?, ZERO, Why? You got it he didn’t sell. When you have a plan stick to it, crashes will happen as sure as sunrise follows sunset. Guess what? I will be on the same boat as you when they do. They are merely bumps in the road. Proper planning and sticking to this plan will get us to our destination – Like a well functioning sat-nav.
With the right time and money we will achieve the goals we set, and if something stops us (or tries to stop us)? Well the insurance you have will replace the time that is robbed from you.
Before I go, Remember what said about the crashes and how the market always recovers to form higher highs.. Well of course that means the same is true of Black Monday – Todays value of ONLY 1 of Warren Buffets shares in Berkshire Hathaway? Over $360,000 PER SHARE..
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