Before I became a financial planner with Lifetime, writes James Fisher, I spent a year training to become secondary school science teacher. While that turned out not to be the career for me, I certainly learnt a lot that I use to the current day.
One of the things you soon find out as a trainee science teacher is that most kids love space. I know that I was fascinated by the stars and planets when I was a child too.
One of the coolest resources (if you’re a geek!) I came across was a website called “Scale of the Universe”. [https://htwins.net/scale2/]. I’d suggest you check it out if you’ve ever had a passing interest in science, or send it on if you know someone who does.
Zooming in and out through the vastness of the cosmos certainly gives a sense of perspective, but what on Earth (12,700 Km across!) does this have to do with investment markets?
The Sub-atomic Scale
At the tiniest level, we see the day-to-day, or hour-to-hour commentary of the financial pundits. If you were to Google “FTSE 100” you would see stories with headlines like “FTSE 100 hits over two-week high on commodity boost” or “FTSE 100 dips on lower commodities prices”. The financial pundits have a job to do – they need you to click on their stories or buy their papers. But much of what is said on a day-to-day basis is noise and understanding exactly what has made a market move on a particular day is a difficult, perhaps impossible task.
Hanging on every word of the money pages in the paper is a sure-fire way to cause worry – but it isn’t likely to shed much light. For that, we need to zoom out a little further.
Life on Earth
At the scale of months to a couple of years, patterns and factors affecting markets begin to become a little clearer. Certainly, at the moment we can see that both equities (shares in companies) and bonds (more similar to loans to governments or larger companies) have fallen in value.
The factors which have led to this are easy to see. Inflation – the rising cost of living – is at its highest level for decades, strongly driven by the increased price of energy, fuel and commodities such as food. Central banks like the Bank of England are targeted to keep inflation down. To do this, they raise interest rates, which makes it more tempting for people to save rather than spend, and makes borrowing more expensive, further reducing the amount spent by businesses and everyday people. By bringing down levels of spending in the economy, inflation, in theory, should also fall.
Increased interest rates cause a reduction in the value of existing bonds, and the value of shares also falls as companies are likely to make less profit if it is more expensive for them to cover their debts while consumers are spending less money at the same time.
All of this has of course been made worse by Russia’s invasion of Ukraine, which has caused suffering and misery for millions, both directly through conflict and indirectly by increasing food and fuel prices further.
Looking at the scale of months to a couple of years, it is natural to feel concerned about what is happening in the investment world. But to understand what it means for you, we need to zoom out even further to really see the bigger picture.
The Solar System and Beyond
When you first become a Lifetime client, you may well go through our Truth financial planning process. This uses your current financial information and some assumptions about the future to look at your life from your current age right up to your 100th birthday. You can’t zoom out on a human life much further than that!
When we put your financial plan together, we assume a modest average annual investment return over your whole lifetime. But we know in reality that it won’t be exactly the same each year. The weight of history tells us to expect there to be temporary declines in the value of your investments as well as better-than-average years.
At this scale of a whole life we can see that an individual financial crisis such as the one that we are living through now is actually just a small dip in the road rather than a major setback.
Experience tells us that financial markets go through cycles of growth followed temporary declines, and while the dips are never comfortable, they are to be expected. By remaining invested throughout difficult times, you are more likely to benefit from recovery when it eventually comes. Research backs this up and shows that often in financial markets, the very best days come close to the very worst days. This is part of the reason why trying to time the markets perfectly is practically impossible.
Rather than focus on the day-to-day market commentary, for your own peace of mind it might be best to zoom out, remember that investing is a long-term pursuit. Also, bear in mind that events like these were considered when your plan was put together.
Life can often feel different with a change of perspective.