Authors:
Juan-Luck Clackworthy, Jame Skuse, Mia Steenkamp of Southern Cross Wealth
Investing for Yacht Crew
Why it is important to not get distracted by short-term market movements.
Global markets gain and lose value on a day to day basis, sometimes millisecond to millisecond. The extent of these fluctuations is determined by the competing emotions of fear and greed of the buyers and sellers making the market. Their emotions are driven by a constant stream of information about global economic conditions, government policy, corporate performance and expectations of the future. How this affects you as you are off for your next charter, or consider changing vessels, depends on the amount of risk you have chosen to take within your investment portfolio. The riskier assets in your portfolio, the more volatile you should expect your investment journey to be. Investment returns are based on the price movements and income distributions (by way of dividends and interest) of the underlying assets owned whether they be stocks, bonds, cash or listed property.
Market Volatility vs. Investment Goals
Through the first quarter of 2019 volatility and uncertainty have been at the tip of the tongue for global analysts. One of the world’s leading market indicators, the S&P 500, over three months fell close to 18% by December 2018 only to regain all its losses by April 2019, just three months later.
Now more than ever it is important to reflect upon your original investment goals and objectives, take the emotion out and stay the course. Investing is a nautical circumnavigation of the globe during your lifetime, not a season in the Caribbean. A common mistake made by novice investors is not committing to staying invested for a given time period. The investor, at the sight of uncertainty and losses, gets cold feet and withdraws their funds or shifts to an investment with less risk, effectively locking in their current losses. As an example – had you invested $50,000 in a fund tracking the S&P 500 at the beginning of October of 2018, your investment would be worth $9,000 less by the end of December. Had you panicked and moved your now $41,000 into cash or to a fund comprised of less risky assets, you would have effectively locked in the $9,000 loss. The problem with this type of reaction is that often when there is a market correction, as in the S&P (and all other major stock indices) over the 4thquarter of last year, it quickly regained the 18% by the end of April 2019. The graph below illustrates the drop in the Market Price of the S&P 500 in Dec 2018, and the correction in April 2019.
Source of graph: www.investing.com– S&P 500, United States, D, NYSE (CFD), 27 May 2019.
Buy Low Sell High vs. Investing for Retirement
The yacht crew investor who exited will not recoup their losses and will continue to lose with each knee-jerk reaction and reinvestment. The loss comes from either missing the gain of the recovery, as you removed your investment or not gaining back enough ground on your investment through a lower risk investment. Maybe the $41,000 you invested now only returns 2% a year or $820 based on the lower risk asset.
The graph below shows the S&P 500 for the past 40+ years. There was the dotcom crash of 2001 and the financial crisis of 2008 (as shown by the arrows), and a recovery with substantial growth from 2010 onwards. Had you sold your investments in either 2001/2008, you would’ve locked in your losses, and missed out on the correction in the market and growth in your portfolio.
Source of graph: www.investing.com– S&P 500, United States, D, NYSE (CFD), 27 May 2019.
The lesson is, don’t try and time the market. Ie. try and get in when its down and out at a perceived peak. Even seasoned investment professionals are unable to consistently time the market. It’s not timing the market that counts but time IN the market that does.
A time horizon is set to give investors a recommended minimum exit date on their investment to ensure they ride out the inherent volatility of the investment. Staying invested and not second guessing yourself over short-term volatility is an important part in meeting your investment goals and return objectives.
Investing vs. Saving
There are many savers, including superyacht crew, with a stockpile of cash who choose to keep their money in the bank rather than invest it. This saving strategy may seem riskless, however it can also be wealth destroying without the saver even realizing it. If one doesn’t seek return, the real purchasing power of money is lost over time through inflation. Ie a Coke may have cost $1 10 years ago but is $2 today: The purchasing power of your money has thus halved.
To build wealth, you want your money to work hard for you and earn a return rather than just sitting there with a return lower than inflation. Wouldn’t it be great if your cash made you money while you are sleeping, working the season in the Med or are saving for a house someday? It is possible!
Remember that maximizing investment returns involves taking calculated risks. Having more of your portfolio allocated to higher risk (read more volatile) assets such as stocks (AKA equities or shares) has historically provided investors with the highest “inflation beating” return over the long run. As the name suggests, a share gives you a shareholding in a particular company.
If your investment portfolio holds (invests in) equities, you effectively acquire a fraction of ownership across a diverse range of companies. These shares are traded on a stock exchange such as the NYSE (New York Stock Exchange) and therefore have their price determined by a willing buyer and willing seller many times every business day. Historically, the highest long-term returns have been provided by the equity market as compared to the other traditional asset classes. This outperformance comes at the cost of short- and medium-term volatility borne out by the old adage “higher risk, higher return”. One does have to be mentally prepared to withstand ups and downs of the volatile ride – you have to be able to sleep at night. This emotional factor is a very important component to take into account when determining an appropriate portfolio. The point is to start Now. Today. Take a charter’s worth of tips and invest it. Take your next paycheck and invest 15% of it. An early start and time are your greatest advantages!
Plot a Course for Success with a Wealth Manager
Portfolio and wealth managers diversify clients’ investments across different asset classes which smooths the return curve but in any portfolio with potentially inflation beating assets volatility is inevitable.
It is important to understand these concepts and stay the plotted course because it gives you the best chance of reaching your investment goals and objectives. This is often where a wealth manager or financial planner plays a critical role.
“If you want to be a smart investor, ignore the noise. Instead of spending time and effort trying to figure out what the future will bring, construct your portfolio based on long-term thinking and long-term convictions – not short-term market movements.”- Investopedia
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