On Monday, markets across the world plummeted in response to fears of a Chinese economic slowdown. The FTSE 100 closed down 4.6 per cent, while the S&P 500 closed 3.9 per cent down. At its lowest point, the FTSE 100 had lost as much as 6 per cent.
On the same day, various commentators were at pains to emphasise the depth of the crisis already being referred to as ‘Black Monday’. A former adviser to Gordon Brown, Damian McBride, even used his Twitter account to offer a number of tips to people to deal with the ”looming crash”, such as converting all assets in to hard cash, stocking up on bottled water and tinned food and agreeing safe meeting places with loved ones.
The majority of commentators were more restrained, but it was hard to escape the sense of panic. The subsequent days were filled with news of alternating upswings and downturns, adding to the sense of uncertainty.
Yet this situation is hardly unique – every time a market shock occurs there is a spate of negative news, which serves only to weigh on the minds of individuals invested in the markets. Natixis research among individual investors found that a majority struggle to avoid making emotional decisions when market shocks occur, with 84 per cent saying they would choose safety over performance if forced.
In most cases investors have long-term needs for the money they have invested, whether it is saving for retirement, sending children to private school or university, or buying a property. It is these goals that should be the focus for investors, rather than beating market benchmarks on a day-to-day basis. Working together to define these goals specifically is where advisers can help their clients rise above concerns about volatility.
Goals-based investing is an approach that has long been taken by institutional investors and some financial advisers, and has helped to rise above market shocks. The better the understanding of future required outlays, the better and more robust the plan can be to meet them.
Where advisers can really add value is to help their clients add meat to the bones of any financial aims – if a goal was initially to ‘save for retirement’, an adviser can work with their clients to narrow this down to ‘retire at 60 on an income of £40,000 a year’, for example. The key is to define, as closely as possible, the funds required to meet the goal and the amount of time required to accrue them.
An investment plan can then be developed to meet this goal based on the client’s current and potential future financial situations. Crucially, any plan should take in to account market shocks, such as the current fallout from China, and emphasise the importance of having a properly diversified portfolio capable of withstanding adverse market conditions.
There is already an appetite for this kind of investing – three quarters of investors we spoke to told us they would be happy to be on track to achieving their goals, even if their investments underperformed the market for a period.
Developing personal benchmarks – understanding how much money they will need to reach their goal and exactly when they will need it by – will help clients develop a far more realistic picture of their investment performance than simply looking at market benchmarks such as indices. It will also help them look beyond short-term volatility and avoid making rash, emotional reallocations that could affect their long-term performance.
McBride may be a lost cause, but if advisers help their clients work out a proper set of defined investment goals and a plan to meet them, they needn’t panic in the same way when markets take a turn for the worse.
Matthew Shafer is head of international distribution at Natixis Global Asset Management.