You Shouldn’t Worry About Short Term Market Falls With A Financial Plan!

You Shouldn’t Worry About Short Term Market Falls With A Financial Plan!

By

Rikesh Bhatt, Director of 8FP and Financial Planner

As I write this blog today, global stock markets are going through some (normal) ups and downs.

 

Recession fears, rising inflation and increasing interest rates mean the S&P 500, for example, is down 13% year to date. (By contrast, the UK FTSE 100 is down 0.5% during that same time).

 

This has led to a standard response from the media recently:

 

“Global stock markets head for steepest weekly fall since 2020 as recession fears rise” – Guardian

“Stocks suffer steepest weekly fall since onset of pandemic” – FT

“Stock markets plunge again as flurry of interest rate hikes fuels recession fears” – BBC 

 

The media often focus on these headlines as it taps into some key emotions – Fear and loss aversion. Whilst the concept of fear is well known, loss aversion is really interesting.

 

Loss aversion is defined as a phenomenon where a real or potential loss is perceived by individuals as psychologically or emotionally more severe than an equivalent gain. 

 

For instance, the pain of losing £100 is often far greater than the joy of gaining the same amount.

 

As financial planners, we can try to mitigate temporary falls by using investment portfolios that are diversified by geography, asset type and sector. However, the impact of this is limited.

 

Where we can really make a difference is by helping clients manage their reaction to temporary market falls. This can be done in a number of ways:

 

1.     Ensure clients have enough cash reserves and income to wealth the storm.
2.     Explain how market falls are a normal and inevitable part of investing.
3.     Anchor clients to their own Financial Plan.

 

By far the most effective tool in the kitbag is that third option: A Financial Plan. 

 

A real-life example of how a Financial Plan protects you against market falls

 

Lets explore this in more detail using an example Client called Mrs Jackie Jones.

 

Jackie is currently a full time Lecturer. She enjoys her role, however, plans to retire in 3 years to begin the next chapter of her life. She’s come across recent media headlines and has been approached by colleagues who are concerned whether the current markets will affect their retirement plans.

 

Before setting up her Pensions, Jackie worked with her Financial Planners to build her plan. 

 

This is a financial model which had the following information applied to it:

•       The current level of assets
•       The current level of contributions to her pension each month
•       An assumed inflation rate
•       An assumed investment growth rate
•       A forecast of her annual spending once she retires in 3 years

 

The results look something like this:

 

What the plan did is help to answer some really important questions:

1.     When can Jackie retire?

2.     Is she going to have enough income available for the rest of her life?

3.     What would be the impact of additional spending?

4.     What would be the impact of additional saving?

5.     What level of risk does she need to take?

6.     What’s the impact of a fall in markets?

 

It’s this last question that’s particularly useful as it’s possible to model, in this case, a 30% fall in market that lasts 1 year.

 

This fall is shown with the orange line. No market fall is shown with the black line. As you can see, the difference is negligible.

 

This gives Jackie the peace of mind and clarity that a short term fall will not have a long term impact and so she should remain calm and effectively “stay in her seat”.

 

Clients that don’t have a financial plan are very much left to hope for the best and are far more inclined to press the panic button.

 

In summary, clients that are anchored to a financial plan have meaning and perspective when it comes to market falls and their finances overall.

 

If you would benefit from having a Financial Plan or want to learn more, please get in touch with us at info@8fp.co.uk

 

Rikesh Bhatt, Director of 8FP and Financial Planner

 

To see Rik’s other articles, click here.

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