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Investment & Retirement Income Planner
6th June 2017
Regular readers & listeners will by now know that Informed Decisions isn’t in the space of trying to predict the markets, we leave that to the fortune-tellers of this world!
I don’t see any benefit to you in me dissecting the daily news-feed and trying to interpret what that means for our investments, pensions, property prices etc. Nobody can do that with any degree of accuracy. Also, what difference does it make if the price of something which you intend holding for 10, 20, 30 or 40 years fluctuates by 0.1 or 1% this week?? If you think the prices are high today wait till you see them in 10 years time.
And that is what this week’s shortish blog is out to address, our human inclination to do something stupid at the absolute wrong time!
Prefer the Podcast Version?….
There is a lot of talk lately the global economy is ‘over-heated’, markets in general are at high prices and that they are expensive (they are broadly now at ‘pre-crash’ levels). This commentary suggests that there is a crash coming, that one should not invest, should not move forward with their plans until such time as the markets fall (also known as ‘ market correction’, whatever that is meant to mean!).
Combine all of this commentary with the political uncertainty (and that’s all it is in uncertainty!) of Trump, Macron and others. What some are predicting is a perfect storm of doom and misery for the world! We really don’t have any idea if the economy will or won’t ‘correct’, nobody does. It was expected that the economy would crash once Trump was elected, but the opposite happened.
What is certain is that there will be another crash, there is always one around the corner, and the sooner we can get our heads around that the better. Why? The main reason for long-term success with our investments is not the performance of the markets but our own behaviour!
If markets fall you could in theory essentially then buy more ‘stuff’ for less money. It’s like going into a shop today and the stuff you want is €100, but if you wait for the ‘correction’ (in this case a sale!) you can buy them for €50. But what if you already have €100 worth of the stuff, and you are listening to this commentary and you are worried your stuff will fall in value to €50!? Or indeed that it has fallen in value to €50. Do you all of a sudden sell your stuff because it has fallen in value?? Based on our experience investors and pension savers will try to sell their investments and get out at a loss when the markets fall. It is in our human nature, and that is why it is so hard to over-come!
Just as we are not in the business of predicting the future we don’t pretend to know it all, however we do know that there will be another crash in the future. A crash will happen whereby equity markets will fall pretty dramatically, pension funds will fall in value, people will lose jobs and mortgage repayments will be a challenge for some. That is not being a dooms-dayer, it is being a realist!
Image we are in 2020 (just picking a year, not a prediction!!). Markets are crashing, unemployment is back up, pension funds and investments fall by 30%, the global and Irish economies are in recession, it’s constant bad news in the media and property prices are falling again. We feel like we are back in the eye of the storm. Will it ever stop falling? Is this the end of the world as we know it? These seem silly remarks right now but these are the fears that are played on when a severe ‘correction’ hits. So what will you do with our assets when it happens?
What will I do if my pension fund falls in value by 30%?
Let’s assume you are currently paying into a pension. You get a statement each year showing you how much it is worth and how much it has grown over the past year. As of writing this if you are in a mid-range risk fund that is probably in the region of 8-10% in the past 12 months. You are happy enough and possibly even take that rate of return for granted! Imagine again that it is 2020 and you get a statement showing that your fund has fallen by 30% in the past 12 months, that a big hit to take no matter who you are!
What would you do? You probably realise that the smart thing to do is to keep saving, and even to save more because prices are low. However what most of us actually will do is stop saving into it because of the fall in value! Even worse what a lot of us will do is we essentially sell our fund and move it to a more secure option, thinking we are doing the right thing! If something we own falls in value, does it make sense to hold onto it and wait for it to rise again, or to sell it now at 30% less than what we paid for it?? I’ll let you answer that one!
What will I do if my savings & investments fall in value by 30%?
Right now there are unprecendented amounts of money being invested out of deposit accounts and into ‘investments’ (products and shares which offer higher potential for growth). Similar to the pension funds about people are achieving decent levels of growth at present. However imagine again it is 2020 and you are told that your plan is actually now down 30% in value over the past 12 months! Aggghhh! So do you sell or do you hold?
As equity markets fall we typically see that deposit rates climb. That was evident in 2010-2012 when you could get 4-5% Gross on a deposit account….tempting when markets are falling by 30%!! However, if you have invested at the outset with a clear plan and strategy which allowed sufficient time to recover from any ‘corrections’ then again there is only 1 feasible answer.
What will I do if property prices fall by 50%?
As property prices are rising in this country the amount of people wanting to buy one is also rising. When property prices were falling there were very few people interested in buying them. There were a few larger institutional investors who recognised what was happening and bought everything they could when the ‘world was coming to an end’ in this country! They doubled and tripled their investment by buying when nobody else could or would in 2010-2011 and selling their assets a few years later. Some will say ‘I would have but the banks were not lending’. Our recollection is that they were, and that the majority of people saw the constant media doom and gloom about property values, that very few other people were buying, and so decided it was not for them.
Imagine it is this fictitious scenario in 2020 and property prices crash 50%! What would you do? If you already own a property would you voluntarily sell it for 50% less than what you bought it for?? Would you be keen to buy another? We looked at the maths of being a landlord recently, does that appeal to you? Would it fit with your plan? Or would you see that nobody else is buying, prices falling, and decide it is not for you?
Informed Decisions will still be here in 2020, and perhaps we will invite people to read this blog between now and then as things continue to be good, and maybe some point in the future we will invite people to read this when things aren’t so good, and maybe just maybe it will help some people make more informed decisions with their money…..maybe!
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