2022 has been an awful year so far for investors. Both equities and bonds are down, there is no return on deposits and inflation is only getting higher. Yet investors are not panicking as before. What has changed?
It is now easier than ever for people to invest money. More people invest than in the past when you had to get a stockbroker to place the trades for you. Now you can set up an online trading account pretty easily and do it yourself. These investors have seen how volatile the markets can be.
People also remember the credit crunch and dotcom recessions and the impact it had on people’s savings and pensions. But they also remember the markets recovered and those that lost out were those who panicked and cashed out when their funds were down. Give it time and your investments will recover.
I shudder when I think back to the investments being made during the Celtic Tiger. The most popular investments were centered around property and funded by debt. People owning multiple apartments without ever having to put down a deposit. That debt being interest only so no capital was being paid off. Property syndicates being funded with mezzanine finance. Thinking equity investments in Irish banks were blue chip.
We are now seeing people reduce their debt as much as they can and built wealth in a long term sustainable way. That means no borrowing to invest in highly concentrated assets. Not seeing Ireland as the centre of the universe but a tiny player in the global market. Instead of investing in Irish companies with little reach outside these shores, we invest in mega size companies who truly have a global reach. And we invest in lots of them, from different countries and different industries.
The recognition that cash forms part of any investment strategy. While we can plan most of our expenditures, we can’t plan them all. From time to time an unexpected bill comes up. Having ample cash on hand allows us to pay for these bills without dipping into our investments in a falling market.
Cash also acts as a comfort blanket. Investments will grow your money in the long term, but volatility, especially in the short term, provides uncertainty. Knowing you have cash on hand and knowing the exact value of it, provides people with the security they need to let their investments do their thing without worry.
And a key difference today to what has happened in the past…
People are working and busier than ever. The construction industry is booming. The hospitality industry is back up and running after Covid, with people making up for lost time. Once the pay cheque coming in every month and covering the bills, investors are able to continue to take a long term view on their investments. Markets are down? I’ll just have to keep my money invested for longer and that is fine, I don’t need the money now. But if we start seeing jobs disappear as well as markets falling, there will be a big change in people’s attitude.
28 March 2022