How a Long-Term Investment Strategy Can Reduce Your Market Risk
“I can calculate the movement of stars, but not the madness of men”
Sir Isaac Newton in the wake of the South Seas Bubble Crash
If you’ve spent any amount of time as an investor you will have been exposed to the highs and lows that financial markets can create. Often the markets appear quite logical whereas at other time there appears to be no rhyme or reason for their behavior. Mastering the markets has been an elusive goal for investors for centuries – even geniuses such as Sir Isaac Newton have fallen foul of market volatility, losing a significant sum of money during the South Sea Bubble crash of the 18th century.
To this day pundits claim to be able to predict market movements yet few have success in doing so. Those who have taken a long-term approach to their investments, ignoring short term market movements, have shown this approach to be the more successful.
You can’t avoid market volatility – but you can manage its downside to your advantage and at least minimise the risks you face. Here’s our suggestion on some strategies that will help you in the long term.
- Don’t try and second guess the markets. There are too many factors affecting share prices to believe you can second guess short term price movements. Taking a long-term attitude to the fundamentals of a company will normally yield you the most secure return. Since 1900 the Dow Jones industrial average has increased from less than 100 to over 18000 – an annual growth rate of 10.4% per annum on average. That’s despite living through one of the most turbulent centuries in history with two world wars, a major depression and an arms race that threatened to end mankind.Of course some decades had little to no growth but the overall result has been positive for investors.
- Consider dollar cost averaging. This is where you use any decline in prices as an opportunity to purchase more stock, lowering the average price you have paid for the ones you hold. For many the natural reaction to a declining market is to sell but by then the damage has been done. Adopting Warren Buffett’s approach of purchasing when the market is “on sale” can be a more lucrative opportunity to improve your long-term gains.
- Keep a balanced portfolio. Having all your eggs in one basket, or just a couple of baskets, is a recipe for disaster. Balancing your risk is the safest option to protect your equity and will minimise any drop in one sector of the market. How your portfolio is made up will be dependent on your stage of life and whether you are seeking income or growth from your investments.
- Have someone else manage your fund. The risk of managing your own investments is that it becomes easy to be emotionally involved. Leaving your portfolio in the hands of a sound financial advisor will see you resisting the urge to tamper with your portfolio or make decisions based on an emotional reaction.
Market volatility can be nerve wracking to deal with but managing it well could create opportunities where others are fearful and provide you with the chance to increase your long term return from your investments. Talk to our expert team today to discuss how your portfolio can be protected against fluctuations.