Top tips for investing in tough times
Here are six tips on how to stay focused during turbulent times:
1. Diversification is king. Investors with a well-diversified investment strategy that has been formulated as part of a long-term financial plan should not be unduly concerned with the market’s recent moves. The aim of diversification is to build and protect your wealth by ensuring your investments don’t all move in the same direction at the same time.
2. Risk and return are related. The higher the expected level of return, the higher the risk (or volatility) you need to be willing to accept. Therefore it’s important you have a realistic expectation of what kind of returns are achievable and sustainable over the longer term given your appetite for risk.
3. Don’t bail out early and miss the market recovery. Reacting to market corrections is a dangerous strategy because it often means you miss out on the subsequent rebound. History has numerous examples of sharemarkets tumbling and nervous investors bailing out, only to miss its eventual recovery.
4. Stay loyal to your long-term investment strategy. Sharemarkets generally reflect the broader economic environment, so investors should expect periods of low or negative returns during weaker economic conditions. Any long-term investor will, therefore, experience poor returns at some stage. The reality is though, that history tells us markets bounce back and eventually return to, or even surpass, previous levels.
5. Always check in with your financial adviser. Two of the most important components of a financial plan are:
- an assessment of your long-term financial goals, and
- an assessment of your appetite for risk.
If either of these components has changed, speak to your adviser about your financial plan. If they have not, then it is unlikely that the recent market movements should trigger a change in your strategy.
6. And finally, it’s time in the market – not timing the market – that matters. Investors in shares need to be invested for the longer term. Over shorter time periods (up to a few years) sharemarkets will go up and down and this will affect investment returns. However over the long term there’s a general upward trend in the market. Therefore by staying in the market and not trying to time its peaks and troughs, you can usually grow your investments over the long term.
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