By: Riccardo Fontanella
You might be a seasoned investor or a newcomer to the world of investments. These investment principles dispel some investment myths you might have heard.
These timeless principles will help you to:
appreciate the importance of long-term investment commitments rather than succumbing to short-term investment pressures
the value of a balanced approach in meeting your investment needs and long-term financial success
The ups and downs, twists and turns
The market will have good days and will have bad days. Investors anticipate bumpy rides along their investment journey, but they don’t always understand just how bumpy it can get from time to time. The ebb and flow of markets can affect your investment’s performance, which can send you on a roller coaster ride of emotions that may lead to poor investment decisions. When panic sets in, or you feel the impulse to make knee-jerk investment decisions, talk to a financial adviser. Expert advice on managing your assets and investment choices at the right time could be the difference between an investment strategy that fails, and one that ultimately rewards.
With great risks come great expected return
A commonly used adage in investing is that the greater the risk, the greater the expected return. Different investments respond differently to risk and therefore the returns investors can expect from them. The key is to strike the right balance between a blend of investments that suit your tolerance for risk and that also work together to grow and protect your savings, converting them into wealth over the medium to longer term.
The funnel of doubt
Typically, asset classes display a wider range of investment returns in the short term, which then reduces significantly over longer investment periods. This narrowing of investment returns over time is likened to a funnel that appears wider at the top and narrow at the bottom. It is natural for investors to think that they are getting the best possible outcome by investing in assets such as cash and bonds whose returns tend to be more predictable and defensive over time. Yet, the narrow range of return outcomes may not be enough to achieve long-term investment goals. Different investments, which produce a range of different return outcomes, can help protect and preserve savings as well as grow them enough to preserve the purchasing power of those savings over time.
Sometimes doing nothing is doing something
Investors’ emotions see-saw when markets go up and down. Resulting emotions could drive impulsive investment decisions that ultimately, like the event that sparked them, end in undesirable investment outcomes. Studies have repeatedly shown that investors who did not attempt to time the market would have almost doubled the amount of money than the investor who missed the 10 best trading days by trying to time the market. Changing a long-term investment strategy because of perceived short-term risks or gains often ends in missed opportunities or even losses.
Equities are the place to be especially if time is on your side
Outperforming inflation is key to investment success. It means that savings and investments stay ahead of inflation, minimising its ability to eat away at the purchasing power of hard-earned rands and cents. Growth assets like equities have consistently outpaced inflation over time. However, this outperformance typically means that investors should expect fluctuations and a wider dispersion of their returns when investing in this asset class. This is the short-term cost investors pay for converting savings into wealth over the longer term.
Taking the good with the bad
You get market fluctuations, and then you get market crashes. Based on evidence, the best returns are made at the end of a market crash. Each downturn is an opportunity for an upturn to happen. The more days that are missed during a subsequent downturn, the steeper the investment losses will be. Long-term investing does not need too much of your participation – it just needs your patience.
Go global
Going beyond borders can be daunting, but it has its benefits. Investors could access broader investable opportunities, protect against local currency concerns or diversify their investments even more. It’s important that you speak to a licensed financial adviser, as this will inform how much global exposure is right for your needs.
Short-term noise or long-term serenity
Markets go through cycles. Taking a step back and observing the markets over longer time periods will reveal a more tranquil picture. Short-term market turbulence is substantially muted and the investment journey suddenly seems a lot smoother and palatable. This perspective reminds us that paying too much attention to the market’s ups and downs can cause unnecessary sleepless nights.
When panic sets in, or you feel the urge to invest in more of the same thing, talk to your consultant or financial adviser. They are there to protect you from yourself and to ensure the actions you take keep you on track to meeting your short- or long-term objectives. Expert advice on managing your assets and investment choices could be the difference between an abandoned or misplaced investment strategy, and one that ultimately rewards. Choose wisely.
Riccardo Fontanella is the Head of Technical Marketing at Alexander Forbes Investments
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