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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?
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.
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.
This time is different
People tend to react to market volatility in one of two ways:
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.
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
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!
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.
Sending love from Peru
Alan and Katie