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Financial Strategy: Long Term or Short Term Investments?

Financial Strategy: Long Term or Short Term Investments?

One could be forgiven for thinking that most news reporting on the currency market ups and downs are predictable. We are bombarded in the financial media with so many convincing arguments about where the Australian dollar is headed in the year ahead.

These forecasts we read about are often prone to error and lead us to make short term reactive decisions that can be potentially damaging to our long-term goals. To avoid making such decisions it is important to create a financial strategy before you begin investing. 

Long Term Financial Strategy: Set Percentage Allocations

To avoid making reactive decisions investors may be better off deciding on a set percentage allocation to offshore investments, sticking with this plan, and rebalancing every year back to the target.

For example, let’s take a simple example of a portfolio equally split between assets based in Australian dollars and US dollars. Perhaps over the course of a year, the US dollar component weakens resulting in the investor’s mixture of assets changing to 60% Australian dollars, and 40% US dollars.

The investor then rebalances by selling 10% of the Australian portion to invest this in US assets. The rising Australian dollar versus the US dollar in 2009 and 2010 was an example where it may have required rebalancing of this magnitude.[1] 

Short Term Financial Strategy: Financial Media Noise

When caught up in the moment, we are often faced with noise from the financial media that the current currency trend, no matter what it is, is here to stay. This makes it difficult to stick to such a disciplined approach towards investing.

Yet, if investors undertook this proposed disciplined financial strategy, then they may well have been taking some significant profits on these investments only a few years later.

Long Term Financial Strategy: Be Diverse

Changing one’s mind based on reading a convincing currency forecast in the news can prove to be a costly error; it’s always worth discussing your investment options with a financial adviser before acting spontaneously on market news.

Having a portfolio with a strategic allocation to offshore investments can have the added benefit of diversification. We are well exposed to the Australian economy via our jobs and the price of our main residence. Weakness in the Australian economy could result in a serious decline in our currency and asset markets, whereby some offshore exposure may act as a shock absorber to the portfolio.

For instance, we shouldn’t forget that at stages during the GFC, the Australian dollar declined by more than 30% against the US dollar in a matter of months.[2]Investment portfolios that were diversified with some offshore currency exposure and had a financial plan in place were likely to fare much better during this volatile period.

Offshore markets also offer potential access to dynamic sectors of the world economy that may be difficult to replicate with Australian companies. Think of big names such as Apple, Facebook, Amazon, Netflix and Google. Viewing the currency markets as a way to diversify your investment portfolio and enter new markets rather than as a vehicle for speculation may provide better outcomes within your financial plan.

Time to think about a financial strategy?

If you are considering how to improve or diversify your investment portfolio, get in touch with us at Master Your Money Now. We specialise in financial advice and financial planning and we will be able to tailor your financial strategy to your needs. Come down to our Geelong office or book an online strategy session today!  

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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Disclaimer: This information is general information only.  You should consider the appropriateness of this information with regards to your objectives, financial situation and needs. Past performance does not guarantee future returns.

Chris Carlin is an Authorised Representative (No. 1235031 for financial services and No. 514748 for credit) and Master Your Money Now Pty Ltd ABN 65 627 229 681 is a Corporate Authorised Representative (No. 1265677 for financial services and No. 514747 for credit) of Infocus Securities Australia Pty Ltd ABN 47 097 797 049 AFSL and Australian Credit Licence No. 236523

 

 

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Information published on this website has been prepared for general information purposes only and not as specific advice to any particular person. Any advice contained in this document is General Advice and does not take into account any person's particular investment objectives, financial situation and particular needs. Before making an investment decision based on this advice you should consider, with or without the assistance of a qualified adviser, whether it is appropriate to your particular investment needs, objectives and financial circumstances. Past performance of financial products is no assurance of future performance.