It is very easy to let emotion control our investment decisions when experiencing market volatility: especially when we are being bombarded with constant media coverage reporting gloomy performance and falling share prices.
Many people put off investing simply because they don’t know when to start – they are seeking “the best time”. Others who are already in the market worry when the news is negative and are tempted to join in the panic and sell. Often, this is the worst thing to do!
There’s a lot of evidence to suggest that “timing the market” has little to do with long term success. The key is to make decisions calmly and after seeking professional and reputable advice.
Here’s some advice from the experts:
Keep a cool and informed head!
Question your decisions: Are you making a choice based on emotion or informed financial analysis? You should always be able to provide a sound justification for your decision.
Keep informed. Read a range of balanced economic analysis, such as that produced by reputable research houses or organisations such as the Reserve Bank of Australia. Learn to sort fact from sensationalist media articles. Your Financial Adviser is a good source of high quality financial information
Don’t try to pick the best time to invest
Many people try to pick when is the best time to invest. They aim to invest when the market is low, hoping to get more for their investment dollars. They wait until the market falls, and then wait some more just in case it falls further. Unfortunately, markets are unpredictable, and waiting to invest may mean you miss out on periods of strong returns.
By abandoning your long-term investment plan when the market is falling, and then investing again when the market improves, you could miss the opportunity to purchase your investments at a lower price.
A more appropriate strategy is to invest as soon as you have the money available – and keep it invested. This ‘buy and hold’ strategy means that you do not allow yourself to be influenced by the ups and downs of the markets. You just have to remember that it’s your ‘time in’ the market that can make all the difference – not your ‘timing’.
Add to your investments regularly
Making regular contributions means you can grow your investments without worrying if it is the right time to invest. It allows you to ride out market changes and can help you build your wealth sooner, due to the power of compound interest (i.e. earning interest on your interest). Regular contributions into your investments mean that you automatically buy less when the markets are high and more when they are low, averaging out the amount you are paying for your investments. This is known as “dollar cost averaging” and works regardless of whether markets are going up or down.
Maintain a well-diversified portfolio
Diversification can assist in avoiding investment biases by helping you to see your portfolio as a whole, and part of a long term strategy. Investing through a managed fund can also help you avoid becoming attached to certain stocks and can be an effective way to diversify if you don’t have a huge amount to invest.
Get professional advice
Professional financial advice is critical to investment success. Financial Advisers have access to a range of material not available to individual investors. When you are making investment decisions, your Financial Adviser can help by offering guidance and a balanced viewpoint
Start investing as soon as you can
As we’ve said, don’t wait for the best time to invest – start as soon as you can through a regular investment plan, or using any lump sums that you may receive. The sooner you start; the sooner you can commence growing your wealth.
Information current as at 31 March 2016 – This information is of a general nature only and has been prepared without taking into account your particular financial needs, circumstances and objectives. While every effort has been made to ensure the accuracy of the information, it is not guaranteed. You should obtain professional advice before acting on the information contained in this publication. You should read the Product Disclosure Statement (PDS) before making a decision about a product. Mark Chaston is an Authorised Representative (No. 263236) and Chaston Financial Solutions Pty Ltd ABN 55 124 139 430 is a Corporate Authorised Representative (No 1244249) of ClearView Financial Advice Pty Limited ABN 89 133 593 012 AFS Licence No. 331367 GPO Box 4232, Sydney NSW 2001