A Lifetime of Volatility and Value
A Lifetime of Volatility and Value
21 December 2022
The world, recovering from the sudden impact of a 2 year pandemic, seems to be suffering its own form of long Covid.
The virus finally caught me in early November and, while the worst of it lasted a couple of days, I still have a "post-viral" cough - a decent description for 2022.
In October, we had to put our lovely little cat, Frankie, to sleep. Before it happened, we wanted to explain the situation to our 5 year old, Nathan. Our googling told us that we should keep it simple and avoid euphemisms so we told him that the vet would help Frankie into a special kind of sleep and that once he was asleep, he would die and wouldn't come back from the vet. Nathan digested this for a moment and said "that means there will only be 4 of us left in the house" which we confirmed. He then tilted his head to the side, looked at me knowingly and said, "I think you'll be next"!.
He then explained that it was because I was the oldest and, fortunately, he didn't say when it might be. This was a moment of sadness that turned into hysterical laughter. When it comes to financial markets, we refer to sudden changes as "volatility" which can be defined as "liability to change rapidly and unpredictably, especially for the worse". The companies of the world saw sharp declines in price during the year although not as dramatic as the impact on some Government Bonds of rapid interest rate rises. Crypto-currencies took a beating, falling by 60-70%, roughly the same fall as the Meta (Facebook) share price. The only company likely to have been immune from this was whoever manufactures name plates for the palace of Westminster.
The most obvious example of volatility, and the one that grabs headlines most frequently and triggers episodes of panic, is linked to the stock market. In many ways, the stock market should be the most predictable form of volatility; the average decline of the S&P 500 (proxy for the US stock market) in any calendar year is -14%. It is, understandably, far easier to look upon the changing price of investments as something that should or could have been avoided. However, in a sense, it doesn't even meet the definition of volatility as being "unpredictable" - The data is there - we know it will happen.
The interest rates available in fixed term bank accounts have quadrupled from 1% to 4% - on the face of it, a great help. But when we remember that money is only as good as what you can buy with it, the interest rates with inflation taken into account have fallen from about -1.9% to -6%. Cash is important - it enables us to cover unexpected costs, it's simple and it's useful in funding planned outgoings within the short-term. It is, however, terrible for funding a consistent lifestyle.
Given that we can never really know how long that lifestyle will go on for, remembering to "zoom out" will still be one of the best tools in the box; the perspective and discipline to avoid reacting to short term news in favour of a long-term vision is the foundation. Where money retains purchasing power or even grows above that over the long term, it can facilitate the hosting of festive dinners, donations of money or time to meaningful causes, helping grandchildren with a first home, experiencing a flat tyre in the middle of nowhere on an adventurous cycling holiday, throwing a Golden Wedding anniversary party or even just seeing that long-awaited West-end show. It can also ensure that if times get tough in the future, there's still a meaningful amount available to fall back on. There are many people now struggling to get anything other than the basics and sometimes, not even that. Most of the people I know are fortunate to be able to choose the value they get from money.
If the US Stock Market were celebrating it's Golden Wedding Anniversary this year, it would have increased in price from £1 to £286 - an increase of 28,500%. There were periods of significant fluctuation, as there would be in life, but there is also value to be gained from patience and adaptability along the way. On the basis that I would like to enjoy a good 50 years from now, I can expect significant changes in health, family and lifestyle along the way. But, by the time Nathan gives me the final nod, I'm expecting that life will have provided a return in the form of experiences, personal connections and memories of more than that 28,500%!