Long term investors must learn to stick to the plan

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Do investors need to develop new strategies that react to the type of global events seen this year, such as the China slowdown and its impact on resources, the Brexit vote and US Presidential election?

Jonathan Philpot, wealth management partner at HLB Mann Judd Sydney, says the answer really depends on whether they are long term or short term investors.

“Short term investors, such as people saving for a house deposit or a major holiday, probably have their wealth mostly in secure assets such as term deposits and cash rather than growth assets such as equities, as these might represent too much risk, depending on when they need access to their funds.

“Their returns are at record lows, but their best approach is probably to keep their secure savings in short term deposits.

“However, most of us are long term investors in some form, saving towards retirement or other non-defined goals. And even retirees need to take a long term view if they wish to live on their capital for the rest of their life and pass on wealth to the next generation.”

Mr Philpot said many retirees who wish to preserve capital think they cannot accept volatility of share market returns, however the low interest rate environment will force people to take on more risk than they may have wished for.

“This year alone we have had three periods when the Australian share market fell by five percent or more. These were: following the resource price collapse in January; the Brexit vote in June; and more recently the uncertainty during and following of the US election.

“Such volatility causes many people to worry about share markets and perhaps consider not investing in them or, even worse, taking their money out.

“A long term investor will look through the short term noise to focus on what it is they want to achieve.

“All investors need to remember the purpose of their investments, which means sticking to their investment strategy and its objectives, despite short term volatility.”

He illustrated this using the retiree example, taking a retired couple who have $1 million in savings.

“If they decide they need $50,000 a year for the rest of their lives but also want to preserve the real value (after inflation) of their wealth to pass it on to their children, there are certain facts they must face.

“Put simply, if they wish to meet their goals they require a return of seven percent a year. This will cover the annual five percent withdrawals needed to live on, and also allows two percent for inflation. A seven percent annual return would meet their goal.

“However one thing is clear – at the moment investing in fixed interest alone will not provide a seven percent annual return, and some level of risk is required in order to generate the higher return.

“Another factor that is often overlooked is that there may be some years, or even a few years consecutively, when the seven percent return is not achieved. However, the aim is a seven percent per annum lifetime (average) return, and as long as the average is maintained, the couple are meeting their objectives.”

Mr Philpot said that the message for long term investors is not to react to the unexpected events or crises that pop up, as they will occur in different forms and at different times.

“This should be anticipated and factored in as it is part of investing. Such occasions should be seen as a possible opportunity to take advantage of cheap asset prices.

“Otherwise the noise should be ignored and investors should stay focused on the long term goals.

“While it is inevitable that we continue to see knee jerk reaction to geopolitical and economic news, it does appear that investors have learned from experiences such as the GFC and are more able to tolerate the sort of short term fluctuations we have seen this year,” Mr Philpot said.


HLB Mann Judd Sydney is a firm of accountants and business and financial advisers, and part of the HLB Mann Judd Australasian Association.

For more information please contact:

Jonathan Philpot
Phone: 02 9020 4196