Being a Confident Investor

In recent years, with the global economy going through a relatively chaotic phase, we have seen plenty of screaming headlines like “$40 billion wiped off Australian share market in one day!” and “Markets brace as the crisis in Europe flares up again.”

These headlines might be great for selling newspapers, but they are not much use to us as investors and can seriously mislead us.

In the face of all these apparent disasters, it’s very easy to panic and to make snap decisions.  It’s only natural but it’s also one of the worse things you can do as an investor.

DON’T PANIC

Douglas Adams put it very neatly on the cover of the Hitchhikers’ Guide to the Galaxy, which reads ‘Don’t Panic!’.

When we see share prices plummeting due to the latest apparent economic catastrophe, our immediate reaction is likely to be “I must do something before it’s too late!”

So what do we typically do?  We withdraw our investments and reinvest the money in a term deposit.  Then, when prices pick up again, we cash in the term deposit and buy shares again.

What are we really doing when we do this?  Often the result is that we have repurchased our shares at a higher price than we sold them — exactly the opposite of a desirable outcome.

BUT IS IT DIFFERENT THIS TIME?

After every major fall, the Australian share market has bounced back in a big way — over the last 100 years, the overall trend has been consistently upwards.

Of course, there have been negative years, but these are easily outnumbered by years with positive returns.

Any attempt to pick short-term stock market high and low points for buying and selling inevitably leads to the majority of people making incorrect decisions.  Even the most expert investors don’t have a crystal ball telling them what the market’s going to do in the short term, so what chance do we have of getting it right?

SLOW AND STEADY WINS THE RACE

For those with capital to invest, a simple and comparatively low-risk way to invest is to ignore the rises and falls of the market and keep investing at a steady pace.

You might buy at a higher price one month, a lower price the next.  Over time it all averages out, but you’ve substantially reduced the risk of making a big but avoidable mistake.

Assuming we have very well-diversified investments, good advice might be to just stop tinkering with them altogether.

A sensible approach can be to stop trying to squeeze out the last percentage point of every potential return and accept the ‘market’ returns which can be far easier to obtain and very satisfactory.

To make this approach work though, you need a long-term plan.

WHAT’S YOUR IDEA OF LONG-TERM?

People have different ideas of what long-term means, but it may be longer than you think.  A long term investor is a person who makes an investment for a period of at least five years in order to achieve a long-term goal.  This goal could be for a comfortable retirement.

Retirees, who have been sensible enough to seek advice, has resulted in them owning broadly diversified, well-managed investment portfolios to generate their income. They continue to be content with their investments even during recent stock market volatility.

Evidence suggests that even after drawing a minimum legislated income from such a portfolio (this % amount increases with age), our capital can last many years.

AND WHAT’S YOUR IDEA OF A PLAN?

If you’re serious about investing you’ll have already worked out a long-term plan with your financial planner; a plan designed to ride out the lows and highs of the investment markets; a plan that covers investments, superannuation and insurance.

Your financial planner will show you how you can diversify your investments so that when one class of assets goes down (e.g. shares); another may well go up (e.g. bonds).

The key is choosing a mix of investments that suits your goals and where you are in your life, and then sticking with these investments through the market highs and lows or until your objectives change.

MASTER YOUR MONEY NOW

Being a confident investor comes with time, support and the right strategy. Master Your Money Now is a financial planning agency in Geelong with online financial planners ready to help you with your investments. We get to know who you are from the comfort of your own home and will help you develop a financial strategy that suits your needs.

If this is a topic that you would like to discuss in more detail, please go to www.MasterYourMoneyNow.com.au/getstarted to book in your complimentary 30-minute strategy session.

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