"An impulsive decision to change your strategy due to short-term uncertainty probably has more to do with your emotions than rational thought” - Richard Ebbs
After a long period of consistent gains in equity markets investor tolerance for volatility is again being put to the test.
Share markets have changed like the weather in 2016 beginning with the worst ever two week stretch to start a year as Chinese equities went into free fall and crude oil fell to its lowest levels in 12 years. That was followed by a sharp recovery and by the end of the March quarter equity markets had made up all the losses and then some.
Then came Brexit in June and markets panicked following Britain’s unexpected vote to leave the European Union; the S&P index for example fell 5 percent in two days after the vote but recovered quickly; by July 12 the S&P was 2 percent above pre-Brexit levels.
Mercer Strategic Advice Leader Richard Ebbs says it’s been a dramatic year but volatility is nothing new or particularly unusual.
“Throughout your investment lifetime, it’s highly unlikely you’ll see your returns go up in a straight line; there will almost certainly be peaks and troughs along the way; when it comes to investing, uncertainty is always a sure thing,” Richard says.
“Market turbulence is one factor that’s completely out of your control but there are others; changing tax regulations and shifting superannuation and pension rules can muddy the way head and make investors feel really uncertain.”
Richard says investing is an emotional exercise; people tend to want to put money in when the market is high and everyone is happy, and to “sell, sell, sell” when markets go south.
He says investment strategies should not be made in response to news headlines but according to a rational investment plan that considers your “time horizon” – how long you intend to hold your investments – your tolerance for risk and whatever else is happening in your life.
“An impulsive decision to change your strategy due to short-term uncertainty probably has more to do with your emotions than rational thought,” Richard says. “When the markets fall or government policy changes for the worse, the most important thing is to make informed decisions and stick to your investment plan.
“And if you don’t have an investment plan; get one.”
Richard says the number one strategy for managing risk is diversification; investing in different asset classes including cash, fixed interest, shares and property.
“Holding a wide range of different types of assets is just common sense,” he says. “But getting the right strategy and adapting to the evolving economic landscape requires a high level of expertise.
“The best way to get through turbulent times unscathed is to get advice from an expert, make a plan and stick to it.”
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