If you have investments in equities you will have experienced a roller-coaster ride of late, with share markets around the world rising and falling on the back of news emanating from various corners of the world.
If you have investments in equities you will have experienced a roller-coaster ride of late, with share markets around the world rising and falling on the back of news emanating from various corners of the world.
The Greek crisis, the devaluation of the Chinese currency and the recent decision taken by the US Federal Reserve not to raise interest rates have resulted in widespread confusion and uncertainty.
Dramatic shifts in the market can make even the most seasoned investors uneasy. Some might be tempted into panic selling or irrational buying when the market is volatile, but doing so could have disastrous consequences.
A sensible strategy during turbulent times is for investors to maintain their focus on the reason for having equities as part of their diversified portfolio of investments. Investing (as opposed to speculating) is a long-term process, so investors should not be unduly influenced by daily or weekly volatility.
This is not to suggest that investors should do nothing during turbulent times. However, it is important that they don't panic and make decisions that they will live to regret. The philosophy of investing is relatively straightforward. You should ideally start to invest as early in life as possible and make saving a priority.
You should aim to construct a diversified portfolio of investments, with a solid foundation of income-generating assets as well as more adventurous assets that will hopefully grow at a rate significantly above inflation. You should only invest in assets that one understands, and steer clear of any investment that sounds “too good to be true”.
You should invest for the long term, rather than trading in and out of investments, and one should reinvest investment income – such as interest and dividends – so that one’s portfolio grows exponentially over time through compounding.
You should always take advantage of the tax-efficient aspects of certain investments, and should at all times be realistic about potential growth and returns. You should avoid following the herd, but rather have a plan and stick to it. History has repeatedly demonstrated that stock markets do not move upwards in a straight line.
There will undoubtedly be corrections along the way, but the trend has always shown an upward trajectory over time. No other asset class (cash, bonds or property) has outperformed equities over the long term, but there have been periods when equities have underperformed other asset classes.
For amateur investors, to try to time the market and continually switch investments from one asset class to another is usually a futile exercise, and inevitably these investors will miss out on possible rebounds when the market recovers.
If an investment was made using good judgement and conviction, investors should not be concerned during market corrections, as these down-trends are inevitably followed by a recovery in the market.
Spending time in the market is a much more rewarding strategy. During times of uncertainty, investors are advised to seek the counsel of a professional who will be able to provide valuable guidance and support.
Rands and Sense – personal finance for ordinary people – is a monthly column written by Ross Marriner, an accounting and tax practitioner and a certified financial planner.
