Finance

THE REALISTIC OPTIMIST

Andrew Fort B.A. (Econ.) CFPcm Chartered MCSI APFS, Certified and Chartered Financial Planner, Fort Financial Planning

I’ve recently been reading about a concept known as optimism bias: a concept that can sometimes be a leading cause of bad forecasts, bad decisions and confused people. It often arises from underestimating how bad things can be in the short run and how good they can be in the longer run.

I’m writing this article at a point in time when, I hope, we are beginning to see the end of the coronavirus pandemic – there, I’m being optimistic. I also like to think that I am realistic. The end may be further away than I hope.

A realistic optimist is someone who knows what happens in any given day, month, or year will be surprising, disappointing, difficult, and mostly out of your control. But they know with equal confidence that what happens in any given decade or generation is likely to be pretty good, bending heavily toward progress.

In previous articles, I have written about the concept of financial well-being, specifically the benefits of identifying where you want to be at some point in the future and taking appropriate steps now to increase the likelihood of achieving that future goal.

Part of that strategy is to save and invest for the future – we call this ‘delayed gratification’.

A fundamental part of building a sound investment strategy is to identify the range of returns that might be experienced in the future. Most people understand that long-term investments fluctuate in value. The unfettered optimist tends to think that investments will grow in a linear fashion; a pessimist feels that they will move in the opposite direction.

A sound investment strategy will help people to identify the range of likely movements, both positive and negative. It helps them to identify the worst returns that have occurred over periods of time in the past, so that they can identify whether they would be comfortable when the next period of bad performance occurs. It even makes them aware that the ‘worst’ in the past may be worse in the future.

Surprisingly to some, the worst five-year periods of many globally diversified portfolios have provided better returns than cash. The aim of such comparisons is precisely to show people that short term periods of time – let’s say less than five years – can most certainly be surprising, disappointing, difficult and mostly out of your control. For periods of time greater than five years the outcome is indeed likely to be pretty good.

Most importantly, and this links in with an article I wrote last year regarding compound returns, sticking with such a plan for the long-term is likely to produce surprisingly large returns.

ffp.org.uk

FFP is authorised and regulated by the Financial Conduct Authority

Your Life, Your Money, Your Future

Trusted, professional, fee based advice We live in a complex world. At FFP we aim to remove complexity, replacing it with simplicity and clarity so that our clients can enjoy their lives without worry

Telephone: 01935 813322 Email: info@ffp.org.uk Website: www.ffp.org.uk

AHEAD IN THE CLOUD

Our real-time cloud accounting solutions present you with a full picture of your financial position 24/7, allowing you to proactively plan and respond ahead of tax deadlines. For a fresh take on your accounts, speak to Hunts

T: 01935 815008 E: info@huntsaccountants.co.uk W: huntsaccountants.co.uk @Hunts_Sherborne The Old Pump House, Oborne Road, Sherborne, Dorset DT9 3RX