At this time of year, I like to think through what has gone by and also what potentially is to come. The latter is a somewhat pointless exercise, as again demonstrated by the last few years, but it allows us to think most critically in terms of putting you, our valued clients, in a financial position where you will thrive no matter what 2022 brings us.

That is what good financial planning is. Not guessing where the markets will go, but understanding the future is uncertain and putting a plan in place that will succeed over the long-term, no matter what scenario comes our way.

I’d like to split this post up in terms of the general principles and then current observations. Our general principles rarely change; our current observations do because life does.

General Principles

You and I are long-term, goal-focused, plan-driven equity-biased investors. We believe that the key to lifetime success in investing is to act continuously on a specific, written plan.

Likewise, we believe substandard returns and even investment failure proceed inevitably from reacting to – let alone trying to anticipate – current economic/ market events.

We’re convinced that the economy cannot be consistently forecast, nor the markets consistently timed. Therefore we believe that the only reliable way to capture the full long-term return of investing is to ride out their frequent but historically always temporary declines.

Just in the last four decades or so, the average annual price decline from a peak to a trough in the S&P 500 exceeded 14% and in the FTSE All-Share was nearly 16%. Yet, over that same period the average annual return for the S&P 500 has been around 12% and the FTSE All-Share has been 9%.

These data underscore my conviction that the essential challenge to long-term successful investing is neither intellectual nor financial, but temperamental: it is how one reacts, or chooses not to react, to market declines.

These principles will continue to govern the essentially behavioural nature of my advice to you in the coming year… and beyond.

Current Observations

It would seem to be counterproductive to look at these past 12 months in isolation. They were, rather, the second act of a drama that began early in 2020, the precipitant of which was the greatest global public health crisis in a hundred years.

The world elected to respond to the onset of the pandemic essentially by shutting down the global economy — placing it, if you will, in a kind of medically induced coma. In this country, we experienced the fastest economic recession ever, and a one-third decline in most global stock markets in just 33 days.

Governments and central banks around the world responded all but immediately with a wave of fiscal and monetary stimulus which was and remains without historical precedent.

This point cannot be overstressed: we are in the midst of a fiscal and particularly a monetary experiment which has no direct antecedents. This renders all economic forecasting — and all investment policy based on such forecasts — hugely speculative. I infer from this that if there were ever a time to just put our heads down and work our investment and financial plan — ignoring the noise — this is surely it.

If 2020 was the year of the virus, 2021 was the year of the vaccines. Vaccination, as well as acquired natural immunity, are in the ascendancy, regardless of how many more Greek-letter variants are discovered and trumpeted to the skies as the new apocalypse. This fact, it seems to me, is the key to a coherent view of 2022.

In general, I think it most likely that in the coming year:

(a) the lethality of the virus continues to wane

(b) the world economy continues to reopen

(c) corporate earnings continue to advance

(d) central banks around the world begin to raise interest rates

(e) inflation subsides somewhat

(f) barring some other exogenous variable — which we can never really do — equity values continue to advance, though at something less (and probably a lot less) than the blazing pace at which they’ve been soaring since the market trough of March 2020.

Please don’t mistake this for a forecast.

All I said, and now say again, is that these outcomes seem to me more likely than not. I’m fully prepared to be wrong on any or all of the above points; if and when I am, my recommendations to you will be unaffected, since our investment policy is driven entirely by the plan we’ve made, and not at all by current events.

With that out of the way, allow me to offer a more personal observation. To wit: these have undoubtedly been the two most shocking and terrifying years for investors since the global financial crisis of 2008/ 2009 — first Brexit, then the outbreak of the pandemic, multiple following waves, and most recently a 40-year inflation spike. You might not be human if you haven’t experienced serious volatility fatigue at some point. I know I have.

But like that earlier episode, what came to matter most was not what the economy or the markets did, but what the investor did. If the investor fled the equity market during either crisis — or, heaven forbid, both — his/ her investment results seem unlikely ever to have recovered. If on the other hand he/ she kept acting on a long-term plan rather than reacting to current events, positive outcomes followed. It was ever thus. I expect it always will be.

As always, I welcome your comments, questions and concerns. As always, I can’t predict, but I can plan. As always, thank you for being my clients. It is a privilege to serve you.

Adam.

Adam Walkom
Permanent Wealth Partners
Phone 020 3928 0950
Email adam@permanentwealth.co.uk
LinkedIn www.linkedin.com/in/adamgwalkom