Stock markets tend to drive the mood and behaviour of people in much the same way as house prices do – which means there’s not very much action for savers to take, writes John Tuohy.
How often have we had a conversation with a colleague, friend or relative exuberant at a recent record price reached for a house in his or her area, and claiming some wealth recovery on the back of that? Or a conversation where a drop in house prices means that your friend has decided to eat in for a year? We know underneath it all that the nominal price of a house has little bearing on the owner unless they plan to sell a property, and since most of us cannot choose to lock in a house price gain by moving, nor are we hopefully forced to sell under pressure, any wealth or poverty is purely notional. And any action we would take would be foolhardy.
And so it is for stock markets. There is no doubt we have faced a rollercoaster in recent weeks with equities, led by those in the US, correcting after reaching record high levels. The decline on the 5th February was the biggest ever points drop for the Dow Jones Industrial Average in the US. Subsequent declines in Asia and Europe sent many market commentators into prophesies of doom. While the decline didn’t turn into a rout, those at the less frothy end of commentary have concluded we face a time of increased volatility – not surprising, giving all of the uncertainty we face in the world, from Brexit to the efficacy of Donald Trump’s administration to geopolitical tensions on the Korean peninsula.
But before we consider whether there are any things we should be doing, a few key observations.
First, reporting on stock markets is like reporting on anything else – it is not necessarily designed to be helpful analysis, but rather it is intended to attract readers in a very busy news world. Stay informed but don’t be misled by attention-grabbing headlines.
Second, there exists a misunderstanding about the purpose of investment management. Most, in the general public at least, think that it’s a slightly more regulated form of betting on horses, with investors trying to pick winners among myriad potential companies. Investment management is a highly regulated, highly trained profession whose main job is to protect the savings and investments of its clients (protecting savings in an increasingly inflationary environment probably means buying equities rather than placing money in a bank deposit). It is not the job of most investment managers to foresee, and make money from, the day-to-day ups and downs of markets.
Finally, it’s important to note that there is there an asymmetry in how we view savings and pensions. Unlike the house price example, where there seems to be as much emphasis on the upside and downside, few of us get very excited when we think about our pension and the things that we will be able to do in later life. Rather, the concentration is on the downside, and what will happen if we are penniless in our dotage. Thus, we seem to ignore the long-term gains in stock markets over recent years, but get much more excited when things start to drop.
So, we should bear these all in mind when we come to see how we react to market volatility. Whether the stock market rise or fall is good or not depends on the level where you entered the market (a drop is always good for those looking to buy in) and, like our house price example, what you intend to do with your savings.
If you are many years away from retirement, the day-to-day movements of stock markets should be of little interest to you. You will probably want to remain invested in securities with the best potential for growth, such as equities, and you will be able to bear the volatility that these assets demonstrate. A decline only really affects those who intend to sell out of their holdings in the short term, which means those closer to retirement age and due to cash in their pension savings. However, most people in a well administered defined contribution plan will have been encouraged to move into lower volatility investments the closer they get to retirement, so they should not experience anything like the declines highlighted in the press.
For those in a defined benefit plan, the only concern is the ability of that plan to withstand the ups and downs of its investments to pay member benefits. And here the advisers helping the trustees will have been cognisant as stock markets reached record highs that there could be room for some declines. One thing that we do pay investment managers to do is to note the difference between price and valuation – with stock markets high, some analysts were suggesting that valuations were unsustainable and that prices needed to come down to represent a more accurate valuation of the world’s investments. Action may well have taken place then before equities started their wild swings.
So in the end there’s very little for most of us to do in this environment provided you have an investment plan and you are aware of where your main savings are invested. For those who are getting close to retirement and have no plan, it may be a wake-up call to seek out independent advice and consider moving into lower volatility securities if they haven’t already done so. And for those with an overexposure to equities, it could mean it’s time to rein those holdings in. For the rest of us, the recent ructions are more of a talking point for the pub rather than a call to serious action.
John Tuohy is the CEO of Acuvest, independent pensions advisory specialists. Acuvest is an independent pensions and advisory management business taking care of the futures of over 40,000 of our clients’ employees. For more market analysis and expertise follow Acuvest’s daily updates on Twitter @AcuvestIreland and LinkedIn and our fortnightly blogs.