When it comes to building wealth, it’s important to have a long-term perspective. This means that when the stock market is volatile, you need to ignore any media hysteria and stick to your plan.
It may be tempting to jump out of the stock market to avoid further losses, but this can be an expensive and unnecessary strategy. While past performance is no guarantee of future performance, historically share markets have recovered after periods of volatility. Remember the old adage that ‘it’s time in the market rather than timing the market that counts’.
A powerful way to reduce the riskiness of your portfolio and smooth your overall returns is to diversify your investments. This means selecting asset classes and individual companies that are lowly correlated or whose investment returns don’t move in line with each other.
With regular rebalancing, a diversified portfolio can normally earn higher returns than the average returns generated from individual asset classes.
Even the most experienced fund managers have difficulty picking the best time to buy and sell investments. It’s actually better to invest the same amount of money in the share market at consistent intervals.
This is called dollar cost averaging which helps smooth the fluctuations in entry prices. It also takes the emotion out of investing, which is important during tumultuous market conditions.
While some stocks may look very cheap on paper, it’s important to go back to basics and examine their fundamentals. You need to select companies with solid management and strong cash flows. Avoid investing in companies when you don’t know anything about their level of gearing or debt covenants.
During prolonged market volatility, it’s a good idea to re-examine your investment goals, time horizon, risk tolerance and financial circumstances.
We can determine the best strategy for you and make sure that you stay on track to achieve your goals.