With markets continuing to have a torrid time and now the start of job losses in the tech sector, there is an increased level of worry for investors. Last year saw bumper returns for investors so this years volatility is somewhat of a shock for investors. Some are beginning to ask, how much can I lose before it has a real impact on my future plans?
I have written about this before, time is your friend. Market volatility is not new, we have seen it before. We have spoken about it before. It is something that we are unable to predict and we don’t know in advance what the cause of it will be. But like all the times before, we have seen the markets recover. Being able to leave your investments where they are for long enough will see them regain their losses.
Unless you do something like crystallise these losses by selling your investments and moving them into cash. By doing that you are saying, I am going to take the loss and not give my money the time it needs to recover. Don’t fool yourself into thinking you will get back in when the market recovers. No one rings a bell when markets hit the bottom and there is usually continued volatility as the market rebounds, so good luck in know if any rebound is real or temporary.
If you are approaching retirement, it is a bit more difficult, as you are going to crystallise 25% of the value of your pension in the form of the lump sum payment. But the remainder of the money will continue on its investment journey for decades to come in an ARF (no one buys an annuity anymore).
If you have invested in bad companies, they will not recover no matter how long you give them. We saw last week the collapse of cryptocurrency exchange FTX that went from a $32 billion company to bankruptcy in less than a week. This is a company that people became incredibly rich off but didn’t even have audited accounts!
While FTX is an extreme example, there are lots of other companies that we have seen lose most of their value simply because they were overhyped and didn’t actually make any money. That is why invested in a fund or an index is a much better, and more boring, way of investing. Any well known index will have criteria to being eligible for inclusion in the index. Profitability being one of them. The companies you are investing in are well established and not fly by nights. They are also diversified, so they spread the risk. So while their share price may be down, you know they will come back.
The financial planning software we can can simulate what a market crash scenario has on your lifelong cashflow. In the scenario below, we have assumed a 30% crash today that takes seven years to recover. Yes, there is a reduction in your wealth over the recovery period and a reduction in your overall future wealth, but it not significant.
Whereas, if there is no recovery to the value of your investments and you take that 30% loss, it will have a big impact on your future and you will run out of money.
Steven Barrett
21 November 2022