We came across a nice analogy recently, which referred to the stock market being like someone playing with a yo-yo whilst riding the up escalator. In this situation, what matters most is the importance of focusing on the escalator and not the yo-yo. To continue the analogy, you do of course need to know that you are on the right escalator, otherwise both the escalator and the yo-yo are pointless.
Think of the escalator as the stock market itself, gradually moving upwards. Historically, investing in the stock market has offered real, above inflation, returns, provided the investor keeps their money in the stock market for long enough. The natural movement upwards can be attributed to increases in the global population, inflation, and businesses selling more to more people. The important thing is to remain focused on the escalator over the long term as it continues to move in the right direction.
The temptation, however, is to get distracted by the yo-yo or the price of the market bouncing all over the place. There will always be volatility. There will be changes in interest rates, elections, natural disasters, financial crises, and even global pandemics. The market will move in response.
But just regard this as the yo-yo stuttering. A fundamental truth of investing is that there are no returns without risk. It’s only natural to be nervous when volatility occurs. Try not to be swayed by emotion, however. Don’t make any knee-jerk reactions or suddenly decide to withdraw your investments.
As humans, we’re “loss averse” so we react more strongly to unexpected losses than unexpected gains. This is why our reaction to the yo-yoing of the share price can be so illogical. When the price goes up, we get excited and think we’ve got exactly the right investments but as soon as it bounces back down, we’re in deep depression and those very same investments seem terrible. Yet rationally we know stocks and shares go up and down and have the potential to recover.
It is the concept of long-term financial planning that can really make the difference. Once you are invested in the right asset classes, which are suited to your circumstances, you can have confidence in that decision. View it as the escalator beneath your feet taking you in the right direction towards your destination.
Therefore, our role at EBS is to make sure you’re on the right escalator because if you get on the wrong escalator, for example, on the underground, you’re going to end up on the wrong line and the wrong train unless you get off and start all over again.
So, leave the escalators to us and, instead, think carefully about your goals such as ‘What do you want to be doing in 5, 10 or even 20 years?’, ‘what are your retirement plans?’ or ‘have you got plans to move home at some point?’
Those goals will change over time and you’ll need to keep adjusting your plans. However, discussing your goals with us will help us decide on your investment strategy. Knowing where you’re heading with a robust plan will allow you to keep your eyes focused on the escalator without getting distracted by that yo-yo.