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In recent years, with the global economy going through a relatively chaotic phase, we’ve seen plenty of screaming headlines like “$40 billion wiped off Australian share market in one day!” “Markets brace as crisis in Europe flares up again.” These headlines might be great for selling newspapers, but they’re not much use to us as investors and can seriously mislead us.
In the face of all these apparent disasters, it’s very easy to panic and make snap decisions. That’s only natural—it’s also one of the worst things you can do.
Don’t panic
Douglas Adams put it very neatly on the cover of the Hitchhikers’ Guide to the Galaxy, which read ‘Don’t Panic!’. When we see share prices plummeting due to the latest apparent economic catastrophe, our immediate reaction is likely to be “I must do something before it’s too late!”
So what do we typically do? We withdraw our investments and reinvest the money in a term deposit. Then, when prices pick up again, we cash in the term deposit and buy shares again. What are we really doing when we do this? Often the result is that we have repurchased our shares at a higher price than we sold them —exactly the opposite of a desirable outcome.
But is it different this time?
After every major fall, the Australian share market has bounced back in a big way—over the last 100 years the overall trend has been consistently upwards. Of course there have been negative years but these are easily outnumbered by years with positive returns.
Any attempt to pick short-term stock market high and low points for buying and selling inevitably leads to incorrect decisions by a majority of people. Even the most expert investors don’t have a crystal ball telling them what the market’s going to do in the short term, so what chance do we have of getting it right?
Slow and steady wins the race
For those with capital to invest, a simple a comparatively low risk way to invest is to ignore the rises and falls of the market and keep investing at a steady pace. You might buy at a higher price one month, a lower price the next. Over time it all averages out, but you’ve substantially reduced the risk of making a big but avoidable mistake. Assuming we have very well diversified investments, good advice might be to just to stop tinkering with them altogether. A sensible approach can be to stop trying to squeeze out the last percentage point of potential return and accept ‘market’ returns which can be the far easier to obtain and very satisfactory.
To make this approach work though, you need a long-term plan.
What’s your idea of long-term?
People have different ideas of what long-term means, but it’s probably longer than you think. Take James for example: he’s 50 and his wife is 45. He can reasonably expect to live to 86, and at that time his wife’s life expectancy will still be six years. This means that at age 50, James and his wife need to assume their translation of the words ’long term’ mean together they are a 42-year investor!
Retirees who have been sensible enough to seek advice which would normally have resulted in owning broadly diversified well managed investment portfolios to generate their income, continue to be very content even during recent stock market volatility. Evidence suggests even after drawing minimum legislated income from such a portfolio (this % amount increases with age), our capital can last very many years.
And what’s your idea of a plan?
If you’re serious about investing you’ll have already worked out a long-term plan with your financial adviser; a plan designed to ride out the lows and highs of the investment markets; a plan that covers investments, superannuation and insurance.
Matt Carberry can show you how to diversify your investments so that when one class of assets goes down (e.g. shares), another may well go up (e.g. bonds). The key is choosing a mix of investments that suits your goals and where you are in your life, and then sticking with these investments through the market highs and lows or until your objectives change.
Which investments? Your financial adviser can help you diversify your investments across Australian and international shares, bonds property. This approach will reduce your exposure to any one class of asset and is most easily done through a managed fund.
So what makes a confident investor?
A confident investor is one who can stand back while the markets rise and fall and simply ignore it all; an investor who resists the temptation to panic and intervene when it seems like the whole world is collapsing; an investor who remains focussed solely on their long term and, if and when we have surplus capital to invest we invest a little at a time and avoid any attempt to choose the ‘right’ day.
In the long term this is the investor who can very confidently expect returns that beat inflation; the investor who will increase the real value of their money: slowly maybe, unspectacularly sure, but with high levels of certainty.
If you want to be a billionaire, try inventing something useful; if you’re happy just to be a confident investor, try this:
1. Work out your financial goals, then ask an adviser to help you plan how to achieve them and how to take advantage of the tax laws
2. Invest small amounts regularly and consistently, regardless of the share price
3. Ignore the media headlines—if you’ve set yourself up with a properly-diversified range of investments, they will manage themselves without you needing to intervene all the time.
Confidence comes from making a plan and sticking to it.
Get in contact with head of Financial Planning, Matt Carberry by emailing matthew@vervegroup.com.au or calling 08 81204877, to discuss your investment opportunities today.