This blog is sponsored by Fiducia Wealth Management.
It is fair to say that navigating the waters of global finance is not exactly plain sailing at present. Factors such as Brexit, sluggish growth and President Trump’s apparent determination to spark a trade war are making the markets rather skittish.
On the other hand, we are also seeing indications of strengthening economies in both the US and the UK, especially in relation to jobs and wages, which has created the expectation that interest rates will start to rise from their historic lows.
National financial authorities, such as the Bank of England and the US Federal Reserve, use interest rates as a faucet to control inflation. When prices start to rise - for example, as a result of rising wages and more disposable income sloshing around - interest rates are increased to apply a brake to the amount of money being borrowed, which in turn controls inflation.
There is a misapprehension that rising interest rates are bad for investment. As we have seen this year, stock markets do fall in anticipation of interest rate rises. But this is because traders operate in a short-term world, which is very different to that of ordinary private investors. They gamble on the fact that higher rates will make corporations more cautious with their money and slow down consumer spending. Profits and/or growth may tail off, reducing the value of stocks and shares, so they see it as preferable to sell now at a higher price than they may get 12 months down the line.
This is very different to the kind of long-term view a private investor aiming to accumulate wealth for later life should take. The value of stocks and bonds may dip on the back of interest rate increases, but this will correct over a period of years. Rather than trade day to day on price fluctuations, sound investment relies on careful choice of vehicles that show the most promise over a number of years.
Of course, people naturally do not like uncertainty when it comes to their money. Greater uncertainty can mean greater risk, and while some investors view risk in terms of greater potential rewards and are happy to gamble, for others it can be a reason to back out of the investment game altogether.
Neither approach is what we would describe as a sound financial strategy. In successful financial planning, what is happening in the moment is much less important than the long-term prospects and how your strategies pan out over a five- to 10-year period or longer.
When the media and the stock markets are so immersed in what is happening right now - and quite frankly enjoy making a drama out of everything - it is natural that people end up taking a ‘fight or flight’ approach to investment. But the more uncertain and turbulent things get, the more important it is to hold your nerve, stick to your strategy, and hold course for longer-term goals.
Don’t get drawn into the hysteria and hype. Sound investment strategies require a long-term view, a broad approach, and a careful, steady hand that keeps things on track through regular reassessment and evaluation.
It is also important to put your money into as wide a range of assets and investment vehicles as possible, spreading risk and ensuring your portfolio maintains a balance throughout the inevitable fluctuations and cycles economies go through.
Gordon Kearney is managing director and financial adviser at Fiducia – a wealth management firm that provides financial advice for private clients, business owners and trustees.