In 1789, Benjamin Franklin famously wrote: ‘in this world nothing can be said to be certain, except death and taxes’. Martin Vaughan, Senior Partner of Clear Capital Management LLP (Clear CM), suggests there’s a third certainty - that when an investment is made for the medium to longer term, the value of that investment WILL go down as well as up.
An investment in anything other than cash must be viewed as being for the medium to long term. This is because the value of that investment is likely to go down as well as up during this period. Given that most investments are made with the objective of achieving a greater value at the end than at the start, this must mean that the investment vehicle has to be given time to achieve this objective.
In relation to investing in financial instruments, the fact that the value of the investment will fall as well as rise is the only certainty. Historically, it is clear that, where an investment has been given time to evolve, the value at the end of a longer term has typically been greater than at the beginning. It is also true that any return over a longer period typically provides much better results than would have been achieved by leaving it in cash.
Investing for the medium to longer term should very much be viewed as a journey. You have an idea of where you would like to get to and your financial adviser will have discussed that intended ‘destination’ with you. He will have discussed which road you may need to take, in what vehicle you should travel and, importantly, whether you can get there at all.
Some people will want to drive over the Alps or across the Sahara desert, while others will want to travel only a few miles down the road. The ups and downs of everyone’s journey will therefore be very different.
The good thing about your financial advice journey is that, like having a top-of-the-range satnav, you can have a guide to talk to you throughout your journey. He or she can warn you of oncoming hazards, roadblocks, potholes and heavy traffic – or which backroad will provide the most scenic route. Above all, if you were actually about to embark on a real journey lasting 5 years, you would not expect it all to be on flat, well-tarmacked roads.
During the investment journey, there will be times when things are going really smoothly – but there will be other times when you need to be careful, watch your speed or maybe do a U-turn. This knowledge, above all else, is possibly the most important in terms of investments: There WILL be downs as well as ups.
To shamelessly quote Mr Franklin once more: “An investment in knowledge always pays the best interest.”