You can’t predict the future – but you can be ready for it

This article by Metis Ireland originally appeared in The Sunday Times Ireland.

In the closing months of every year, without fail, we start hearing predictions about how the stock markets will perform in the year ahead.

But if there’s one thing that’s proven itself to be of absolutely no use recently, it’s trying to predict what’s around the corner. Predictions are an entertaining diversion, but that’s all. In January 2020 how many stock market predictions included COVID-19? None. Of course not, they didn’t know! But that’s an extreme illustration of an inherent problem.

In our financial lives we don’t need prognostication, we need pragmatism and practicality. Let’s look at how you can behave your way to wealth in 2021.

Get yourself a financial plan

Behave, you say? But we’ve been doing that for ages! New rules, new (and often confusing) directions about living our daily lives. It’s been a slog for sure, but one thing to come out of the pandemic is the theme of getting back to basics, the things that really need attention. There’s no better spirit in which to get your finances on track, and the way to do it is through a proper financial plan with provision for the short, medium and long term.

You can’t predict the future, but you can prepare for it. Your plan will show you what you need and when, so you can structure your finances around that. A short, medium and long-term plan will likely shake out as a mix of savings, investments and pensions, so let’s have a look at how to co-ordinate them.

Short-term funds

In the world of financial planning, ‘short-term’ means anything under five years, and funds for goals in this timeframe belong in your bank account or credit union. Your goal might be really short-term, like a holiday (remember those?) or it might be three years away, maybe putting the kids through university. Either way this isn’t money to invest, it’s money to sit on. I know the returns are zero, but there isn’t long enough to recover from potential investment losses here.

Avoid: Investing! There’s a word for these resources – ‘savings’.

Medium-term funds

Above five years (ideally seven or more), we’re into investment territory. For this kind of timeline, have a look at an equity/bond portfolio. The ‘split’ between equities and bonds depends on how much volatility you’re comfortable with. If you’ll sleep soundly with a -25% return in a year but an overall average return of 7%, then a 60% equity and 40% bond portfolio might suit you. Remember that diversification matters, I won’t insult you with a cliché about eggs and baskets, I’ll just mention it in passing and we can silently acknowledge it.

Check out the Dimensional Fund Advisors World Allocation Funds for a twist on passive investing, or Vanguard Life Strategies if you’re comfortable with a more ‘vanilla’ approach.

Avoid: Tracker bonds or structured products, typically medium-term investments that come with high fees and will likely just give you back your money after six years or so.

And the long-term?

Once the x-years-from-now tracker hits double figures, we’re talking long-term goals, including retirement. For meaningful growth, funds should be invested directly in a global portfolio of equities. Remember, you don’t need a fund manager with ninja pretensions playing minesweeper with the markets. Active fund managers generally don’t deliver the value you’d expect for the extra costs. Tracking the performance of the world stock market will be fine. You can do it through Exchange Traded Funds (ETFs) – they’re cost effective and they’ll make sure you get as close to the market return as possible.

Remember too that long-term investing doesn’t have to mean lots of risk. If you live for the thrill, knock yourself out, but if you’re looking for steady growth, more often than not you don’t need to take lots of risk. You need to do what’s always worked – invest in the stock market over a long period of time.

Avoid: Active fund managers and more risk than you need. Don’t forget about diversification – too narrow a focus increases risk and can mean permanent losses. There’s a world out there and you have all the time in it (or a good few years at least).

If 2020 taught us anything, it’s that there are no guarantees – absolutely none, about anything. Of course, ‘no guarantees’ is a phrase you’ll find on every investment provider’s website, but just as we behave sensibly to minimise risks in life, so we should behave sensibly with our finances.

The events of recent months may have made little sense, but I’ll take one last wager that your goals make perfect sense. For that reason it’s important to keep a cool head, plan properly and give yourself the best chance of achieving them.