Recent times have brought back fears of a global economic slowdown, with concerns surrounding China adding substantial volatility to the markets. These unsure times generally cause investors to question their
investment strategies and can lead to some investors giving up on their carefully laid plans and selling at inopportune times.
As with all investing, sometimes that tip you receive or that information you have read can end up leading to an outcome that was not what was expected, such as selling down the asset or simply performing poorly.
Sometimes a portfolio of what is seen to be defensive stocks can still end up being negatively perceived and sold down in uncertain markets. The only thing that we are able to control is our choices and hope that, on average, over the long term they pay off.
Its times like these that investors will look at their strategy and try to decide whether it was correct, and while this may be a too little too late type of situation there are some key points that can help you weather the storm.
The first point is to be comfortable with all your investments. Whether this is understanding the intricacies of each individual investment or just the overarching asset class, as an investor you need to be comfortable with what you are invested in and also the amount of risk each asset class may afford you. Sometimes this comfort will come from having individual stocks that are household names or from outsourcing the knowledge to an investment professional to manage your investments. Having expectations of the type of ranges each investment class could have may reduce some of the shock if a sector falls. This also means that even if your timeframe for investing is long, you have to be able to accept the short term ups and downs that you may encounter along the way.
The second main point is diversification. This is a key strategy that can lead to smoother (or less volatile) returns over a period. By creating a portfolio of dissimilar investments, the portfolio will be able to earn the weighted average return of all investments in the aforementioned portfolio. While this in its self will reduce the volatility, the portfolio will also benefit from not retaining the weighted average volatility of the included investments (i.e. volatility of the portfolio will be less than any individual investment). To this end, a diversified portfolio will over time offer a larger return relative to the portfolios risk compared to concentrated portfolios.
The bottom line is that investors should try to remain focused on their investment strategy, rather than focusing on volatility and the day to day of their portfolio. A disciplined approach such as this will generally over the longer term lead to a much better result and reduce costly mistakes that can be created by trying to time the market.
Should you have any questions, please do not hesitate to contact Nathan Porter, Financial Planner at RSM Australia, on 02 6217 0335 or
email: [email protected]