Whoa! Here we go again!
As a kid I detested roller coasters, perhaps something inside me was anticipating the future equivalent – financial markets! Although we went through at least 3 major ‘corrections’ last year, it doesn’t stop your heart going into your throat when it happens yet again. We all have our coping mechanisms, and some work better than others. let’s have a look at what you can do to make the ride more bearable.
Passive management: You can close your eyes and hope it will go away. It sounds like a rotten idea, right? Well… maybe not. What goes round comes round, what goes down usually goes up. It boils down to basic asset allocation. (if you’re not sure what that is, you could have a look at my blog HERE). If you and your advisor have a clear investment strategy based on short, medium (3-7 yrs) and long term (8yrs) goals then you’re probably fine. Sitting on your hands and not being tempted to sell at the bottom of the market is a solid strategy. Very few people can time the top of the market, or the bottom. If they can, they probably are going to keep it to themselves. There is a very simple quote that explains this. ‘The bears win, the bulls win, it is only the pigs that lose.’ Index tracking is another good way to ‘passively’ manage your portfolio, and many large funds are starting to use this principle – mostly to keep down the high Asset Manager costs. If you want to read more about that you can go HERE. I am not saying that you should abdicate the responsibility of your investments to your advisor, but if you partner with them and you have frequent communication from them, then this can help reduce the stress.
Active management: Trying to time the top and bottom of the market isn’t smart -it’s like trying to catch a falling knife. You can read more about that HERE. The market is not a rational beast, it is driven by mass sentiment and is about as predicable as a teenager. Look at the Infographic above: If you start with R100 and buy near the top, and sell near the bottom – which is what happens to the average non-professional investor – then you are going to erode the value of that R100 over time, and hopefully give up. If you’d sat on your hands you’d have been able to parlay that R100 into several hundred. There are a couple of strategies to remove some of the stress from this “investment style” – specifically in the stock market:
- Leave it up to a stockbroker.
- Have unemotional “stop loss” triggers in place to sell before it tanks. You are still going to get caught out when it moves too fast (what rises like a feather often drops like a stone), but you have to take the gambling brain out of the decision.
- Make sure it is ‘playing around’ money and not your life savings.
Diversification : If your investment portfolio is made up of individual stocks, and you haven’t got millions to invest, then you’re going to have to suck up the volatility that comes from lack of diversification. You are going to have to make an ‘educated’, (I hope), punt on the performance of a subset of the stock exchange making an Index pretty meaningless as a benchmark. There is another word for it. Gamble. Yes, maybe not slot machines but it is still a gamble. Just like gambling, be sure you can afford to lose it all. If you’re messing around with derivatives/futures and such that get pushed at you as ‘get rich quick’ schemes,then you can not just lose your shirt, but all your future shirts too. But you know that. ETFs are a good, cheap way to diversify and there is enough variety now that you can take a punt on sectors and not just the All Share Index. Collective investments are the most popular, and obvious way to diversify. If these ‘unit trusts’ have a balanced or flexible mandate, then the diversification will be expanded to other asset classes too.
Education : This is key. Before you abdicate the responsibility for your investments to anyone else, you need to have a basic understanding of things like Asset Allocation, risk and return, expense ratios, volatility. If you’re paying ongoing fees to an advisor, then they should be communicating with you frequently and helping you understand the ever-changing and complex environment of investment.
Action: If the uncertainty around your investments is stressing you out, get them analysed and summarised so you can get on with creating that wealth, not worrying about how they are being managed. It might be time to get an Independent and Professional Financial and Retirement Plan done. You are welcome to contact me for a proposal and quote.
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Author Dawn Ridler