Rules for investing when markets are tough
While it’s natural to be nervous when financial markets are uncertain, it’s important to stick to some basic investment rules to help keep current market fluctuations in perspective. Here are six tips to help you keep your investments on track.
1. Take comfort from history
The long-term trend is up. Over the last twenty years or so, there have been at least ten major events that have had an impact on the Australian share market, including the famous Wall Street Crash in 1987 and the Tech Wreck of 2000. While each of these events resulted in a sustained period of market downturn, the market has always recovered. Importantly, despite short-term market uncertainty in the past, over the long-term the general trend of share markets is upward. Australian shares, for example, continue to perform very well, up 171%1 in the last ten years.
2. Stick to your original investment plan
Understand what you’re trying to achieve and how long you’re prepared to invest, rather than focusing on what’s happening in the market. Keep in mind that the longer your investment timeframe, the more likely you’ll experience some form of short-term market volatility.
Also understand how much risk you’re comfortable with and make sure it’s reflected in your investment plan – for example, investing in growth assets like shares can increase your long-term returns, but it’s likely you’ll experience greater short-term fluctuations than conservative assets like cash. Take a risk profile test to understand your tolerance to market movements.
3. Don’t overreact to short-term market movements
Investment markets move in cycles, so it’s difficult to forecast when they’ll rise or fall. Moving your money in and out of the market during a downturn means you could potentially miss out on any positive bounce gained in a strong market recovery. This view is supported by history. For instance, research on the Australian market since 1985 shows that the Australian share market returned an average of 28% in the year following a negative return.
4. Diversify your investments to help spread risk
Diversification, or spreading your investment portfolio over a range of asset classes such as shares, property, fixed interest and cash – can help you spread your exposure to risk. So, if one investment or asset class loses ground, your losses may be reduced. You can diversify your investment across different asset classes, regions and investment managers or styles.
5. Get advice from a qualified source
If you’re really serious about something, whether it’s building a house or in business – you generally seek advice. Building and managing your wealth shouldn’t be any different. A financial adviser can help you make informed investment decisions based on your needs, objectives and personal circumstances, while taking into account your attitude to risk.
If you would like to speak with a Financial Adviser to find out what this means for you, please contact Rochelle O’Connor on (02) 8066 3311.