Don’t let emotions rule your investment decisions. Use simple rules to guide your strategy and produce good returns.
It's impossible to predict how markets and individual assets will perform in the future. But a little education goes a long way when you are investing. So here are some of the top insights investors with a wealth of experience draw on every day when making investment decisions.
1. What goes up must come down
It's easy for investors to become nervous when markets are volatile. But experience tells us that even when markets drop, over time they recover. For instance, following the financial crisis of 2007/2008, according to Market Data, the ASX 200 hit a low of 3154.4 on 9 March 2009.1 The index has since recovered and has traded in a range between about 4800 point and 5200 points in 2016.
2. Don't change your investment goals just because markets are volatile
When markets are trending downwards or are moving around substantially, it's tempting to change your investment strategy or reconsider your objectives. A better approach is to be consistent in your strategy. Of course, it's important to regularly review your strategy, ideally with an adviser, but try to avoid kneejerk reaction investing.
3. Take the emotion out of investing
When we make decisions about our investments based on our emotions, we usually make poor decisions. This often involves buying into a market when prices are high, and selling when the value of the asset drops. Instead, before you make an investment decision, review where the market is in its cycle by referring to information published in annual reports, by analysts and by industry bodies. The Australian Bureau of Statistics is also a great source of information. If a market has had a strong run, it might be worth sitting on the sideline until prices retreat a little, although this will be totally dependent on the individual investor's circumstances.
4. Remember the power of diversification
Australian investors have typically been overexposed to the local share market, and underexposed to other asset classes like international shares and alternative investments. Instead, it's an idea to ensure your portfolio is diversified across all the major asset classes, as well as other investment categories such as direct property and infrastructure. This will help to protect the value of the portfolio over time.
5. Don't forget to take profits
Too many of us have a set and forget investing strategy. We buy a stock or another asset and simply hold onto it forever. Another approach is to sell down all or part of an asset when it has made good gains, and reinvest the money into an asset that is undervalued, taking into consideration any capital gains tax consequences before you do this.
6. Be prepared to sell an investment that consistently underperforms
We often forget to sell profits, but we can also forget to sell assets that are serial underperformers. We might sit on something and watch the asset's value slowly decline. Another approach is to set a pre-determined price at which you will sell the asset. Making this decision before you invest – and sticking to it – can help corral your losses.
Working with a qualified financial adviser is one way to make a real difference to your wealth.
7. Seek advice
Working with a qualified financial adviser is one way to make a real difference to your wealth. An adviser can help you shape your investment goals and strategies and provide peace of mind when markets become more volatile.
8. Educate yourself
An informed investor is a good investor. So read the business press, ask your adviser for analyst research on the investments you own and make a commitment to keeping across news in financial markets like changes to interest rates, currency movements and any geopolitical issues that have the potential to move markets.
9. Keep an eye on fees
The fees you pay will affect the return you achieve from your investments. So make it your business to understand the fees you are paying on your investment as well as the fees you pay to your adviser.
10. Take into account the effect of currencies on your portfolio
Currency movements can have a significant impact on your overall return, both positively and negatively. Whether you choose to hedge your currency exposure will depend on your view of how the value of the currencies to which you are exposed will move. Some investors wish to be exposed to currency movements and others don't. What's important is to work out which camp you are in and structure your investments accordingly.
11. Set your investment timeframe
It's easy to get caught up in short-term market moves. And if you like to trade assets on a short-term basis it's important to keep a close eye on what's happening in markets at all times. But if you have a long-term view, avoid basing investment decisions on what's happening in markets right now.
12. Buy on bad news
Sometimes a prudent strategy can be to buy quality stocks when their values are depressed because of short-term issues affecting the price of the stock. This can be a great time to buy. But make sure the business isn't in a sector experiencing structural decline, satisfy yourself the problems are of a short-term nature only and make sure the business has the potential for long-term growth.