Market volatility – Tips for riding the rollercoaster
The big picture
Always keep your long-term goals and investment strategy in mind - don't be distracted by daily, monthly or even annual market performance.
For example, you wouldn't sell your house (assuming you own one) if you read in the press that property prices may be falling. And you wouldn't be having your house valued every day either. When it comes to shares though, some people panic at the first sign of a downturn and begin selling off their holdings. This is a short-term view of what needs to be a long-term journey.
When reviewing your investments, there are a number of things to consider, including:
- Remember your investment timeframe
- Withdrawing after a negative return may cause you to realise a loss
- Consider the power of compounding
- 'time in' the market not 'timing' the market
- Market volatility is 'normal'
- Financial advice is important if you're objectives or strategy has changed
Time is on your side
Hang in there. History shows that the longer you stay in the share market, the lower your chance of losing money on investments. You'll also reduce your buying and selling transaction costs and minimise the risk of missing out on gains.
Trying to time the sudden changes in the market and moving money around is risky business – stay on the ride and you're less likely to reduce your profits or incur significant losses.
Keep it regular
By investing a set amount regularly, you're effectively buying fewer shares when the prices are high and more shares when prices are low. Over time, this approach can reduce the impact of sharp declines and help smooth the returns.
Regular investing removes the emotion from the investment decision and ensures you don't get caught up in the market hype and 'noise'. It also helps you avoid buying when the market is peaking or selling just before a boom.
More on smoother safer returns...
May the force be with you
Einstein reputedly called it 'the most powerful force in the universe'. Compound interest, or the interest you earn on your interest, really helps build wealth. Thanks to this force, you also don't need a huge sum of money to start building long-term wealth. And the longer you're on the ride, the greater the effects of compounding.
A balancing act
One of the most reliable ways to maximise your long-term returns and reduce the risk of losing money is through diversification.
By taking a balanced approach to your investments, ie spreading your money across different asset classes, regions, sectors and investment managers, you may be able to achieve superior risk-adjusted returns. And by spreading your investment across different sources of return, your chances of having at least some exposure to the best-performing assets is increased.