Investors Who Don’t Plan Fear Volatility
25 Jun 2017 | Back to Blog
There are very few certainties when it comes to investing, but here’s a big one: volatility is inevitable.
The question is, can you handle the ups and downs of the market? Investors usually respond in one of two ways to volatility. The first is fear, which sometimes leads to withdrawing from the market altogether. The other is the urge to grab opportunities as they arise. Those two types of investors are often separated by the extent to which their plans are well-defined and suitability to meet their goals. They are also differentiated by how well they do over the long term. Those who shy away from investing often miss out on good opportunities.
Market volatility doesn’t have to be a deterrent to investing. Rather it should serve as a reminder of the importance of your investment strategy. Your strategy should be designed for your life, your risk appetite and your goals. These six steps to volatility-proofing your investment portfolio should get you well on your way:
Understand that downturns are often followed by upturns: The popular saying ‘buy low, sell high’ sounds simple enough, but is easier said than done. Most persons do it the other way around, because emotions get in the way. Be rational. Understand the difference between realised and unrealised loss. An unrealised loss occurs when the current value of an investment is lower than the amount for which it was purchased. This would be due to changes in market conditions which are often temporary. A realised loss is what happens when you respond by selling. It then becomes a real dollar amount that you lose. Research shows that investors who buy and hold the same funds over the long term come out ahead of those who keep moving in and out of the market, attempting to ‘keep up’ with the short term changes.
Have a solid plan: If downward market movements give you the jitters every time, your portfolio may not contain the right investments. You should have a mix of stocks, bonds and other investments that match your risk appetite and your time horizon. If you are investing for a retirement 30 years away, for example, you could use a more aggressive portfolio. But if your heart flutters every time the market fluctuates, your mix might not be a good fit for your personality. You may need to adjust to a more risk moderate combination of assets. Be wary however of going too conservative if you have a lot of time, as your portfolio may not carry the necessary growth potential to help you achieve your goals.
Get the right partner: You probably don’t spend the entire day looking at the markets. If you have the right wealth management firm, they do. Find a partner with an in-house research team and Advisors who are available and take the time to listen. Let them take on some of the work associated with choosing the right asset allocation for the current market, as they have a broader and more in-depth view.
Diversify: The key to limiting losses and reducing risk when investing is diversification. At any given time, some assets will go up in value while others fall, so it’s important to invest in assets that will react differently to the same event. Invest in products with built-in diversity, such as Unit Trusts, which offer a simple way to meet a range of investing goals. Unit Trusts pool funds on behalf of many investors with similar goals. That way each investor gains access to underlying investments they could not typically access as individuals. Like VM Wealth Management, your investment company will usually offer a range of Unit Trust funds. You can choose one or more that suit your goals, risk appetite, time horizon and personality.
Invest regularly: Making periodic investments (monthly or quarterly) offers better protection against short-term downturns, which will have less impact on your portfolio’s long-term performance. Keep contributing to your portfolio through the ups, downs and plateaus so you don’t miss out on opportunities. Set up a standing order to have regular contributions moved from your transactional account, where you do your spending, to your investment account. You may need to make adjustments to your strategy to depending on what’s happening in the markets. And that brings us to our final point.
Rebalance every now and then: Life happens. You change jobs, get raises, have children, get married, experience loss, or relocate. Your investment portfolio needs to shift every now and then in response to longer-term changes in the market as well as shifts in your personal life. Remember the example about the investor 30 years away from retirement? What happens when that person turns 50? Retirement is 10-15 years away and they probably have a child about to enter university. Their risk-appetite and time horizon are now different, and it’s likely markets will have changed along the way as well.
Investors need to have honest, open relationships with their Advisors. Your Advisor should always be in your top-five list of people to visit at the beginning or end of the year — and after every significant life event. Your portfolio is essential to achieving your goals and dreams, and it should move and grow with you.