Lessons from the market

 

Every market cycle – bull or bear – provides opportunities for investors to improve their process for investing. The best thing to do is learn from past events and apply those lessons to your future investment strategies and circumstances. Here are the top five lessons you can use to help navigate towards your future desired outcomes.

Lesson 1: Keep your cool
This is the most important learning from recent times. Through market cycles, it’s easy for investors to react emotionally–through overconfidence in rising markets or, equally, reacting with fear in falling markets.

We know that the best way to reach your financial goals is to remain cool and stick to your long-term investment strategies. History has shown us that markets tend to recover just as quickly as they fall.

Lesson 2: Stay invested
While short-term market falls are hard to ignore, it’s essential to stay invested. In fact, long-term investment discipline is more important than ever especially in a market crisis. We know that markets move in cycles, and that historically each bear market has been followed by a bull market. Therefore, if you remove your investment during a down market, you won’t benefit when the market rebounds.

Successful investors understand the importance of sticking to the plan. Those who have built a robust investment strategy, with appropriate diversification, and successfully navigated many market gyrations along the way, keep the ‘plan’ front of mind in the midst of market volatility and emotional ups and downs.

Lesson 3: Diversification still works
Without the knowledge of which asset classes or sectors will outperform, the key is to diversify. Trying to pick the best performing asset class of the year is very risky, considering that one year’s best performing asset class can just as easily end up as the next year’s worst performer.

We believe that a sound, well-diversified portfolio with a long-term focus will help reduce volatility and provide steady, consistent returns over the years.

Lesson 4: Investing in the markets is the primary way to meet retirement and financial goals
The markets can be tough on your nerves, but despite this, it’s important to discount short-term market performance when considering your longer-term financial objectives. Investing is still the most prudent approach to beat inflation and help realise your long- term financial objectives.

Lesson 5: Markets are cyclical. Whatever goes down will likely come back up again
Markets follow cycles of ups and downs. What we don’t know is their timing or duration.

The global share market experienced strong gains in 2009 following the downturn which commenced in late 2007 and more recently, some global markets (such as US shares) have reached historic highs. The point is that markets typically recover.

Different asset classes – like shares, bonds and property securities – carry various levels of risk and return. Investing in a single asset class is risky when you consider no one asset class consistently outperforms on a regular basis.

Strategically diversify your portfolio across asset classes, investment strategies, managers and styles. This approach aims to reduce risk and can help you weather different seasons of the market, no matter which asset, strategy or style is in favour at any given time. Blending complementary asset classes, strategies, styles and managers can also help provide more consistent returns through various market environments.

Lesson 6: Partner with a professional adviser to choose strategies aligned with your personal goals
Investing is personal. It’s so important to make sure that your strategies are well suited to your goals, life stage, risk tolerance and other specific factors that matter to you. For example, a retiree invested solely in Australian shares in 2008 (-38.9%) [1] probably felt the pain of investments that were too risky for his life stage and real-life risk tolerance. A professional financial adviser can help you design a plan based on your personal needs—and stay on track over time.

What we’ve learned
With recent market volatility, investors may consider making changes to their investment strategy and perhaps exiting markets altogether. However, years of lows and highs – such as 2008 and 2009 – help to demonstrate what we think are the key principles of investing:

Diversify – it’s essential to have a well-diversified portfolio to help lessen the impact of market downturns.

Stay invested – don’t miss your opportunity for financial gains when the market recovers. You have to be in it to win it.

Concentrate on the long term – short-term market returns shouldn’t concern the long-term investor.

Don’t try to time the markets, or pick next year’s winner – no one knows when markets will peak and trough, and which asset class will outperform.

Consider working with a professional financial adviser at Highview to help choose investments aligned with your personal goals.
Contact us today to discuss your needs:

Cranbourne: 03 5990 1000
Prahran: 03 9529 1566
Mornington: 03 5911 2100
Ringwood: 03 8899 9797

[1] Past performance is not a reliable indicator of future performance. S&P/ASX 300 Accumulation Index.

Source: Article from InterPrac Financial Planning Quarterly Insight Spring 2018 Newsletter