Why it’s important to trust the plan

By Ian Boasman

Chartered Financial Planner at Kellands (Hale) Ltd Chartered Financial Planners

I heard an excellent quote recently by ex-Harvard professor and Scottish Historian, Niall Ferguson:

‘If the financial system has a defect, it is that it reflects and magnifies what we humans are like. Money amplifies our tendency to overreact, to swing from exuberance when things are going well to deep depression when they go wrong. Booms and busts are products, at root, of our emotional volatility.’

When it comes to money, emotions control our short-term reactions sometimes without considering the long-term implications. Financial Advisers are not life coaches but observing the emotions of clients is a big part of what we do in conjunction with managing money and long-term objective planning.

Long term. That’s a short phrase which comes up a lot in conversations, and never has it been more relevant in financial planning given the world events we’ve seen over the past few years.

It’s human nature to witness recent market events and wonder whether you should be doing something differently or hold off until things improve. We should live for today, as who knows what happens tomorrow? However, any good financial adviser should be able to provide a robust financial plan to help achieve both your long and short-term aspirations.

Let’s take the stock market over the long term. The return of the Mixed Investment 20-60% Shares Index over the past 20 years has been 136% (source: FE Analytics). If you had invested £100,000 and simply tracked this index since April 2002, you would now have approximately £236,000 (not accounting for any tax or charges).

UK inflation over the past 20 years has averaged 2.5% per annum, which is considerably less than the return of that index. £100,000 in April 2002 is worth just under £164,000 today.

When looking at the stock market versus inflation, there is a correlation between the two. For example, as the cost of goods for businesses increases, most individual’s earnings do not rise in line with inflation. So consumers will subsequently spend less on luxury items. Business profit margins become smaller, which then affects its share price. Central banks increase interest rates to combat inflation so that consumers will see more return on their cash savings in the short term, which hopefully encourages them to spend more in time.

However, as we have all read in the news recently energy prices are a big cause of high inflation. When supply doesn’t meet demand, costs increase and everyone feels the pinch, meaning they spend more cash on general living, rather than those luxury items.

Despite uncertainty around global economies, the one thing history tells us when it comes to stocks and shares is that over the long term (10 years +) you should see outperformance of inflation. There might be rocky times in between. However, if you are not a sophisticated investor, our advice is usually to avoid making short term reactions in times of volatility. Remember, ‘timing’ the market is very difficult to do correctly but ‘time in’ the market is your friend.

Whilst history tells us that the stock market will outperform inflation, every individual’s circumstances are different, meaning their time horizon for investing differs. For example, are you approaching retirement soon and need to draw down your funds? Do you have complicated tax planning needs to compliment your investment strategy? Are you looking to pass money down to loved ones efficiently?

These additional objectives are the reason you should seek advice, so that a plan can be tailored to your personal needs. The general rule always applies; investing in stocks and shares should be a long-term objective, however, the little personal points that make your scenario different should always be factored in, which still make these short-term market events important to navigate through.

Another regular question I am asked is ‘am I contributing enough to my portfolio’? Standard practice when making regular contributions into any form of long-term investment is to increase those contributions by inflation each year. However, with the cost of living rising at a higher rate, is this even affordable? There is nothing wrong with pausing this increase until inflation settles down, as the figures earlier show us that your existing capital should return more than inflation anyway.

Your financial plan and objectives are ever-changing and will need tweaking from time to time. But these short-term events are part of the journey which should be planned for at the outset, so that you do not have to make emotional changes along the way.

Trust the plan.

Kellands (Hale) Limited is authorised and regulated by the Financial Conduct Authority. Registered in England No. 193498

Please note that past investment performance is not a guide to the future performance. Potential for profit is accompanied by the possibility of loss. The value of investment funds and the income from them may go down as well as up and investors may not get back the original amount invested. Any figures provided are for illustrative purposes only and are not guaranteed.

This article should not be read in isolation, it is provided for information only purposes and should be considered in conjunction with other relevant information which is available, including that which is held within the public domain. Any views or opinions expressed within this material are provided in good faith and based upon our understanding of UK law, regulation and the financial services market place at this time which is subject to change without notice.

Whilst Kellands (Hale) Limited take responsibility to ensure that the information contained within this article is accurate and up to date, they do not accept any liability for any errors or omissions. If you are in any doubt as to the validity of information made available, they recommend you seek verification by contacting them in the first instance via their website at