A new normal?

We have had a fantastic five years in the market, in which we have seen investments grow at a higher rate than expected.  The challenge with such a trend is that such great returns may be viewed as a ‘new normal’ – that is, investors expects such high returns to continue indefinitely, and fear may strike when the market turns … as if it were an unexpected event.

The reality is that market volatility is both expected and catered for in a good financial plan.  Economists, planners and investors alike know that one in every four years or so could be a negative year in terms of market performance; 2008 is a reminder of this. So, while the media is currently painting a grim picture of the market, savvy financial planners are seeing a recognisable and predictable pattern … one that they have taken into account. They know that a return of 2% to 4% above inflation is a reasonable goal, without unnecessary risk, over a rolling three to five year period.

The value of a financial planner is two-fold:  he can help clients achieve their investment objectives by planning long-term, thereby mitigating those downturns in the market by the inevitable upturns.  In tandem with this, the financial plan, with a medium to longer term view, allows the client to resist the temptation to watch returns every day and every week … becoming unsettled by the fluctuations in the market as a result.

A financial planner encourages his clients to look at what their investments have made over the year, or longer period, and just to be patient during times of lower returns.

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