When markets are experiencing wild swings, having a plan is crucial.
Investors have been through considerable market turmoil since November 2007, and more volatility can’t be ruled out. The outlook for the US economy is still quite unclear and investors are nervous about the prospect of it sliding into recession. If this happens, it’s likely to negatively impact other economies such as Europe and Asia, affecting corporate profits and lowering demand for goods and services.
Make a Plan and Work Your Plan
Having an investment plan is one of the best ways to help ride out volatility in the share market and reduce the risk of making rash decisions. Less experienced investors can be tempted to dive in and out of investments in the hope of making abnormal gains or protecting themselves against large losses.
In contrast, seasoned investors know that market volatility is inevitable. The trick is having the right investment strategy in place to ensure you have the most appropriate balance between risk and return.
One of the keys to successful investing is having a plan. It should include what returns you want to achieve, when you want to achieve them, how you’re going to do it and how much risk you can tolerate.
Plus, it’s important to understand one of the key rules of investment which is the relationship between risk and return. It’s based on the principle that asset classes with the greatest risk (such as shares and listed property) produce greater returns over the long term. However in the short-term they are likely to experience the greatest volatility in their returns. Less risky assets, such as cash and fixed interest, are less volatile but also produce lower returns in the long-term.
Strategies for Volatile Markets
1. Have a long-term view: When it comes to building wealth, it’s important to have a long-term perspective. This means that when the market is behaving erratically, it’s necessary to ignore any media hysteria and stick to your plan.
It may be tempting to jump out of the market to avoid further losses, but this can be an expensive and unnecessary strategy. While past performance is no guarantee of future performance, historically share markets have recovered after periods of volatility. Remember the old adage that ‘it’s time in the market, rather than timing the market that counts’.
2. Diversify your portfolio: A powerful way to reduce the riskiness of your portfolio and smooth your overall returns is to diversify your investments. This means selecting asset classes and individual companies that are lowly correlated or their investment returns don’t move in line with each other. With regular rebalancing, a diversified portfolio can normally earn higher returns than the average returns generated from individual asset classes.
3. Use dollar cost averaging: Even the most experienced fund managers have difficulty picking the best time to buy and sell investments. It’s actually better to invest the same amount of money in the share market at consistent intervals, or buying smaller parcels of investments at different periods of time. This is called dollar cost averaging which helps smooth the fluctuations in entry prices and may result in a less volatile portfolio and portfolio returns. It also takes the emotion out of investing which is important during tumultuous conditions.
4. Do your homework: While some stocks may look very cheap on paper, it’s important to go back to basics and examine their fundamentals. You need to select companies with solid management and strong cash flows. Avoid investing in companies before checking their level of gearing or debt covenants.
5. Talk to a financial advisor: During prolonged market volatility, it’s a good idea to re-examine your investment goals, time horizon, risk tolerance and financial circumstances. As your financial advisor, I will be able to determine the best strategy for you and make sure that you’re still on track to achieve your goals.
If you would like to set up an investment plan, which will have the right investment strategy in place to ensure you have the most appropriate balance between risk and return and to help you ride out the volatility in the share market, then call my office and make an appointment to talk with me. It’s never too early to start an investment plan, and it’s never too late to start an investment plan.
August 16, 2017
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The information provided on this website, including the material and contents provided in the website publications, are informative in nature only and you should not act specifically on the basis of this information alone. It should not be used as a substitute for legal, business, accounting, tax, financial planning or other professional advice. If expert assistance is required, professional advice should be obtained.
Paul Baggetta is the Founder & Principal of Baggetta & Co. Paul Baggetta has been a Taxation Accountant since 1981, a Financial Planner since 1998, and in 1993 qualified as a Real Estate Licensee, holding a Triennial Certificate (currently not trading) and operated his own Real Estate business for property investment clients for over 5 years as a second business.
Financial planning services are provided by Paul Baggetta as an Authorised Representative (No. 261469) of Capstone Financial Planning Pty Ltd. ABN 24 093 733 969. Australian Financial Services License No. 223135.
Taxation & Accounting services are provided by Paul Baggetta as a Registered Tax Agent (No.61487008) and is a Member of SMSF Association, FIPA & NTAA.