Should I stop investing?

Things have gone crazy in the UK. Things have gone crazy in the world markets! Our new Prime Minister decided to give tax breaks to high income earners and borrow £50bn to do it. The pound crashed against the dollar making imports and foreign travel massively more expensive and further fuelling inflation.

My messages, email and other channels lit up with messages of doom and gloom.  The market is down! We need to stop investing!  The £ is at an all-time low against the $! Should we halt all investments until it goes back up?  Is it different this time?  It is all going to pieces!  PANIC!

The market crashed. Why aren't my investments down?

The market crashed again this week and since the beginning of the year the S&P500 has fallen by 22%.  Markets have been tumbling due to inflation caused by spending during COVID, fuel price increases, the war in the Ukraine and uncertainty.  

Something curious has happened for those of us in the UK.  We have seen the £££ amount in our accounts stay steady if not increase!

The S&P is down 22% this year already! 2022 has been a rough ride in the markets

Why, at a time when the market has been crashing, have our accounts stayed level if not even positive?  Because our currency has been crashing too!

If you own the FTSE Global All Cap index fund or the Developed world ex. UK then you own mostly American stocks.  More than 50% of the global economy is made up by the USA and when you are invested in a global fund you own those companies. 

Even though the amount in your account is denominated in pounds sterling the underlying assets are in US dollars.  If the dollar increases in value relative to the pound then so do our holdings. 

All year sterling has been collapsing against the dollar.  From a high of the pound being worth $1.40, all the way down to nearly parity. 

What this means is that if you have investments in the USA then those are now worth more pounds sterling.  It looks as though our investments have done pretty well this year and this is all because of the exchange rate movement, not actual performance.  

What does this actually mean?

One blog reader messaged me saying "with the $ being 16% higher against GBP that means that my investments need to grow 16% before break even when the USD/GBP returns to normal levels"

What the reader is saying is that as sterling is so weak at the moment, when he buys investments he is getting 16% less.  

Let's look at this a slightly different way to test his hypothesis.  Katie and I have just booked to go to Disney world!  Yay!  The happiest place on earth!  We booked around a month or so ago when the dollar was $1.21 to the pound.  We paid a deposit and decided to pay the balance in the coming months as sterling was "bound to go back up against the dollar" as it was at an all-time low in our minds.

Tomorrow, I have to pay the balance and the current exchange rate is $1.09 to the pound.  How wrong was I?  It collapsed far lower than I thought possible. My balance is $4,000.

If I had paid straight away that would have cost me £3,305 at the exchange rate of $1.21.  I didn't and I waited and now that same amount of dollars is going to cost me £3,669.  By waiting I have lost £364. 

Our Disney holiday became far more expensive because the exchange rate crashed.  I am worse off because I tried to predict the exchange rates!  

Sterling is so weak against the dollar right now but who is to say it is not going to go lower and my holiday could get more expensive!

I can't predict what is going to happen next and every time I do I seem to get it wrong!  The best option is: don't predict.

Tinkerbell in the palm of our hands in front of the Princesses Castle!

This time is different

People tend to react to market volatility in one of two ways:

1. The market is at an all-time high.  It will never keep going up like this and we should stop investing as it will stop going up
2. The market is down.  Panic.  I should stop investing as it is down now. I should wait for it to be more stable before I start to invest again. 

People keep telling us this time is different.  The war in Ukraine, inflation, crazy government borrowing and economic policies.  

This time is no different.  The market is always up and down.  It is always volatile.  We have had wars in the past, we have had inflation in the past, we have had crazy presidents and prime ministers. We survived them all and the market kept on going up. 

​This time is no different. 

Should we change our strategy?

​The main reasons people have for changing the strategy are currency exchange rates, inflation and the fact the market is going down. Let's tackle these one by one. 

1. Exchange rates. You can't predict which way exchange rates will go - who says sterling has to go back up against the dollar?  Just because historically, it has been $2 to the pound doesn't mean it will be in the future.  Maybe we are on our way down to below parity and beyond.  Stop trying to predict and just get in the market. You might be buying less stocks with your pounds than you did a month ago, but it might be more than it is in 6 months' time.  You can't tell.  Time in the market always beats timing the market. 
2. Inflation. Inflation is eating your cash alive - at the moment inflation rates are 10% in the UK.  This is crazy.  What that means is that prices are going up by 10% on average. If you have cash, it is only worth 90% of the value a year later because it can buy 10% less stuff.  Inflation is rampant and the only way to protect yourself is to own assets that do appreciate with inflation.  Owning companies is a natural inflation hedge because as prices increase, companies make more money (because they are charging their customers more) and you benefit in terms of dividends and capital growth.  It is better to have your money working for you than have it in a box under the mattress. 
3. The market is going down. You can't predict which way the market will go - our reader is saying that he needs to make 16% extra in the market to make up for the low exchange rates.  Who is to say that won't happen in the next 5 months?  Between September 2020 and September 2021, the FTSE Global All Cap Index Fund went up by 26%.  if you wait you might miss out on the bounce that you need to make up for poor exchange rates. We can't tell if the market has bottomed out or is going to go back up. If you aren't in the market when it starts to go back up, you will miss out on some of the most important growth days of the year. Time in the market always beats timing the market

The Donegan strategy

So, have we changed our strategy?

The short answer is no. 

We have kept our investments exactly where they are and continue to invest in the Vanguard FTSE Global All Cap Index fund and the FTSE Developed World ex UK. 

The only difference since the beginning of the pandemic is a slightly bigger emergency fund which is designed to help us ride out market downturns like this. The emergency fund gives us confidence and helps us to resist selling in a market downturn.  

Business as usual

Volatility is the price of admission into the stock market.  If you want to participate in the average 10-12% annual returns of the stock market, then you need to get used to the fact that some years it might go down 20% and other years it might go up 30%. 

What is happening at the moment in the markets is a normal part of the cycle.   We get Prime Ministers that introduce crazy economic policies from time to time, we unfortunately get inflation and catastrophes that send the market faltering. 

If you are investing for the long term, then this is just another blip on the chart on our steady march forwards.   You will look back in years to come as an experienced investor and say "I remember the crash of 2022 with the Ukraine war, I remember the crash of 2020 with Covid, and we kept our cool and look where we are now." 

For the Donegans this isn't comfortable, but we have come to realise it is just business as usual.  We need to keep our investing cool, continue to invest and keep on moving forwards. 

​If you are investing for decades then this won't even register. 

I would LOVE LOVE LOVE to know what you think.  Please leave a comment below and tell me your thoughts.  Do you think I am crazy, and this time is different?  Do you think we should all panic sell and move into crypto?  I would LOVE to know your thoughts. 

Deciphering a fund fact sheet

Have you ever struggled to read the documents your investment company sends you?  One of the biggest questions we got after Rebel Finance School was "Can you have a look at my investments and tell me if they are ok?"

We can't look at all your investments individually, but we can help you understand the paperwork and what to look for. 

Deciphering a fund fact sheet - Rebel Finance School

Join us on Monday, October 17th live, for a brand-new workshop that will show you how to decipher a fund fact sheet.  We will go through what to look out for, what the terms mean and help you to understand the language of finance at a deeper level!

Click here for details

Thanks for reading the blog.  We hope to see you on the workshop. Remember - keep on working towards bettering your finances.  The extraordinary is built from mundane daily actions like saving and investing.  

Keep going. 

Sending love from Peru

​Alan and Katie