Over the last nine years, stock markets have been generous, providing most investors with relatively strong returns. Some experts are warning that the next few years are likely to be less rewarding and expectations need to be tempered.
The last year was a strong one for many. Despite a host of issues, including rising interest rates, political unrest and uncertainties surrounding Brexit, markets generally enjoyed buoyant returns from a growing global economy. This year has been more difficult, with most markets behaving quite differently to 2017.
Are higher returns a thing of the past?
Some of the caution regarding future returns relates to equity prices having been riding so high on the back of a very long recovery. While many still see scope for further market growth, the overriding message is centred on more realistic rewards and normal volatility returning.
Every day, our media reminds us that our world is a risky place and stock markets could be more susceptible to sharp falls. Brexit creates much uncertainty for business and investors. Markets do not like uncertainty, so the share prices of UK and European companies may well become volatile if investors become nervous.
Uncertainties remain, but so do opportunities
We often focus on the immediate worries, instead of taking a more positive longer view with our money. With stronger economic growth, comes the prospect of higher interest rates and more inflation. There has been unprecedented fiscal stimulus and central banks have been big buyers of bonds. Although this demand is tailing off, it may still stoke inflation. The expectation that monetary policy could be tightened with rates rising at a quicker pace, and to a greater extent than previously envisaged, has weighed on sentiment. These could be signs that we are in the late stages of a ‘bull’ cycle, one that started in March 2009.
Even though economic concerns exist, so do opportunities. Positive investment returns can still be made. The global economy benefits from incredible advances in technology and many companies make huge profits from this progress. Earnings growth supports share prices of these companies. Rising interest rates can also be good for some companies, particularly banks that can increase their margins.
Even when shares fall, there can also be other assets that rise. That’s why diversifying is essential to manage risk. Investment theory advises us to spread risk across different investments that will not all behave in the same way. In the long run, risk and reward are usually linked. Sometimes though, we need to be more objective. We need to think through what our money is for and organise things more sensibly.
Financial plans need to be fluid and reviewed, reflecting life
Investment is by definition uncertain, but risk often needs to be taken to achieve our long term plans and beat inflation. The value of good professional advice includes clearly outlining objectives, having a ‘sense’ check and identifying the right strategies to achieve good outcomes.
Timing is important. Someone who retired in March 2009 faced a very different retirement challenge than someone who retired in March 1989. Early losses while drawing income can be a disaster, and time isn’t always enough to allow investments to recover.
Investors should be patient and disciplined, as well as diversified for plans to be successful. A sound plan should manage the inherent volatility of markets without giving you sleepless nights. It will ensure you aren’t taking too much, or too little risk, with your money.
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Shane Presley is a Chartered Financial Planner for Lloyd & Whyte (Financial Services) Ltd. It is important to take professional advice before making any decision relating to your personal finances. Information within this article is based on our current understanding of taxation and can be subject to change in the future. It does not provide individual tailored investment advice and is for guidance only. We cannot assume legal liability for any errors or omissions it might contain.