Over time, most assets appreciate. So, in theory, investing should be straightforward.
In practice, making solid returns over the long term can be challenging for two reasons.
Firstly, different asset classes will perform differently in different economic conditions. Secondly, humans behave differently in different economic conditions.
As Warren Buffett famously observed, investors are prone to being excessively greedy when times are good and excessively fearful when times are bad.
Consistency trumps luck
The process of managing your wealth, flows through an environment that is typically uncertain, sometimes hazardous though often times rewarding. Through this environment, it’s essential to lean back on a solid foundation of personal behaviours that: align with your long term plan; are inherently proactive; and allow for positivity in your thinking and motives.
Ultimately this means aligning your actions, with the behaviours and habits that are most conducive to achieving the goals you have set for yourself in order to enhance the probability of success – in good times and bad.
For example a consistent proactive attitude means you are looking for opportunities for significant tax optimisation as the end of financial year approaches. This means reflecting carefully not only on costs, but also opportunities to strategically align your asset pool.
Otherwise, positive energy in the face of rising mortgage repayments means a fresh new perspective on your current loan facilities, and the instinct to look at aggressively exploring new options around your relationships with banks and refinancing arrangements.
However, whether you’re a business owner, a well-remunerated professional or a self-funded retiree, you may recently have considered cutting your costs.
After all, your real income is probably flat or falling at a time when your outgoings are heading skywards, especially if you have a business or home loans. So, if it doesn’t seem likely investment prices are going to do much anytime soon, why not just stick any spare capital in a bank account and hunker down?
Time in the market vs timing the market
Let’s look at recent history. When it became obvious COVID would have a profound impact in early 2020, some investors sold their tech shares and investment properties in the entirely reasonable but very mistaken expectation they would fall in value. When the lockdown phase of the pandemic ended around mid-2022, some of those investors who had sold out of the market just before the pandemic-era boom in share and property prices, bought shares and properties in the expectation there would be a Roaring Twenties upswing once life returned to normal – somewhat missing the boat again.
(Before rolling your eyes at such optimism, you should be aware that in recent months there’s been renewed hope that productivity-boosting technological breakthroughs, such as generative AI, might soon turbocharge economic growth, somewhat belatedly.)
Granted, you could be one of the fortunate few who makes money by timing markets perfectly. But especially in an era when it’s increasingly difficult to predict how markets will be impacted by technological disruption, fast-moving geopolitical events and unexpected public health emergencies, a safer approach is to commit to a long-term wealth-building strategy, stick with it, and not be overly swayed with market gyrations.
Minimise your emotional pain, maximise your financial gain
Proactive wealth management is a worthwhile investment in belt-tightening times for all the same reasons it is in prosperous times. But given its costs are likely to be more noticeable and its benefits not so immediately apparent during downturns, you may want to consider the following before making any knee-jerk decisions.
- Economic cycles and life cycles rarely match up neatly. If you have a significant part of your asset base in superannuation or have amassed substantial spare capital, you’re probably over 40. In a perfect world, economic cycles would facilitate you making money from higher risk-higher return investments during the last few decades of your career before transitioning into lower-risk investments as retirement looms.
- However, as events since 2007 have demonstrated, it’s a very imperfect world. If time isn’t on your side, it’s usually a suboptimal approach to hold back in cash and sit on the sidelines waiting for the perfect opportunity to get back into the market. (Especially if the interest rate you’re earning on your savings is lower than the inflation rate.)
- News and social media related financial advice is of limited value. The financial advice that’s now so readily available isn’t necessarily wrong. But it is, by definition, generic and typically aimed at the average person. It also doesn’t take into account that different investors have different tolerances for risk and have unique life goals and circumstances.
Whether you are a 40-year-old business owner dreaming of creating generational wealth, a 55-year-old hoping to take early retirement, or a 75-year-old wanting to ensure your loved ones – rather than the taxman – benefit from the assets you’ve spent a lifetime accumulating, you’ll almost always benefit from partnering with an expert who can offer strategic financial advice that’s tailored to both your circumstances, risk tolerance and financial goals.
A calm expert can prevent you from making irrational decisions. It’s relatively easy to be an investor when times are good, as was the case from around 2009-2022. But investing is more challenging when you need to make difficult decisions about whether to hold onto assets currently falling in value. Or when you need to weigh up the risks of buying an asset that may or may not be undervalued.
These kinds of decisions will always be stressful. But they can be a lot less stressful if you have input that has your best financial interests at heart but also has a degree of emotional detachment.
Such an advisor can provide expert advice on the pros and cons of buying and selling particular assets at particular points in the economic cycle. They can give ongoing and timely guidance on balancing and diversifying your portfolio. They can alert you to the once-in-a-generation opportunities that volatile bear markets sometimes throw up. They can warn you about the tax traps that make a seemingly good investment not so good. And they can also draw your attention back to your long-term financial goals and away from attention-grabbing but short-lived booms and busts.
Going back to Warren Buffett’s observation, market cycles will continue to flow up and down, while over eager investors fluctuate between excessive greed and fear. Within that movement, sometimes saving you from yourself and holding true to your planning principles can be the difference between the fast decision, and the right one.