May 4, 2020
3 min read
Fintech and Innovation
Nicholas Flaherty - Investment Strategist - FWU Invest S.A.
Oil turned into negative territory, stock markets have been whipsawed like never before, while economic news continues to get worse and worse. These are undoubtedly difficult times for any investor. The question then arises: given all this turmoil, how should we as investors currently be thinking and acting? Like we mentioned in our last letter, and we cannot stress this enough, the key is not to make knee-jerk decisions – not to panic. It can prove to be very harmful to your wealth. We should remain calm and collected, allowing us to make logical decisions and even to take advantage of this market environment.
Having a plan can take many forms, depending on the individual and his or her tolerance for risk, but the key is to have a plan – it focusses attention, keeping our eyes on what is important. One of the best ways to build a plan, however, is on time horizons, around the short, medium and long-term.
For the short-term goals – such as money needed for a renovation or a holiday – I would not take on too much risk. Keep it simple; either keep capital in cash or very short-term fixed income instruments. When it comes to the medium-term – so maybe a goal to buy a house in 5 years – there I will look to have some more growth, meaning investing in the credit markets and a little in the stock market.
When it comes to the long-term, however, it gets very interesting – here I dedicate the bulk of available capital to the stock market because I have time on my side. Indeed, time is the single biggest advantage any investor can have: while markets can fluctuate to a very large degree in the short-term – as we are seeing right now – over the long-haul they follow corporate earnings growth, which in turn is driven by global economic growth. I know with a large degree of certainty that the global economy will be significantly larger in 25 years than it is today and hence I know that stock markets too will be higher, meaning I can afford to have a large exposure to stocks.
The trick for all of this is to stay the course, especially for the long-term. It can prove very tempting, for example, to start leaving the stock market now – thinking things will get a lot worse – but this almost never works out. It means that capital will not be in the market when things start to recover, which usually happens very rapidly; gains that will, then, have been missed.
A structured approach is critical therefore and this is also why we have designed the FWU products to account for this, facilitating planning for any investor, starting at low premiums of € 50. Let us take me as an example again. I am a normal investor with a 25-year horizon and want to structure my investments in a life insurance policy.
By investing in Forward Quant, I already get a solid plan in place, which is automatically executed, without me having to interfere: the all-important asset allocation I mentioned above is taken care of. Thus, over the next 25 years, I invest the majority of the time in the stock market, allowing me to benefit from the new technologies and new markets that will arise. And as I get towards the end and nearer to my goal, I automatically move towards fixed income and cash-like instruments.
Finally, to bring this back to our current situation. When investing in Forward Quant, there is still a long time left until my long-term goal, so it automatically invests in stocks now, enabling me to benefit from lower stock prices and the eventual recovery. On other hand, I am also safe in the knowledge that in 25 years’ time, when I unfortunately do not have time on my side, and we potentially hit the next crisis, I will automatically be protected, as I will be shifted into safer securities for the short-term. In other words, I have a plan.
If you would like to know more about how to remain calm during market turmoil, please also check out our latest blog entry, How to remain calm amid market turmoil – Part 2.