These three common mistakes are easy to avoid. Making them could be costly.
It’s understandable that heightened share market volatility can be very unsettling for investors.
And there’s a reasonable chance that markets will remain volatile over the medium term, with inflation and interest rates still high.
Higher interest rates reduce both spending and borrowing power, which impact consumers and companies, and tend to soften flows into riskier investment segments.
Three mistakes to avoid
The first thing is not to be spooked into making rash investment decisions on the basis of day-to-day movements in markets.
Decisions made in response to short-term events will invariably have negative long-term consequences.
1. Failing to have a plan
Investing without a plan is an error that invites other errors, such as chasing performance, market-timing, or reacting to market “noise.” Such temptations multiply during downturns, as investors looking to protect their portfolios seek quick fixes.
2. Fixating on losses
Market downturns are normal, and most investors will endure many of them. Unless you sell, the number of shares you own won’t fall during a downturn. In fact, the number will grow if you reinvest your funds’ income and capital gains distributions. And any market recovery should revive your portfolio too.
3. Overreacting or missing an opportunity
In times of falling asset prices, some investors overreact by selling riskier assets and moving to government securities or cash equivalents. But it’s a mistake to sell risky assets amid market volatility in the belief that you’ll know when to move your money back to those assets.
While past returns are not an indicator of future performance, they do give a fairly good indication of the differences in returns between different types of assets.
Shares are renowned for being more volatile than other asset classes, however they have typically delivered the best returns over longer-term periods.
With an average total annual return of 10%, a $10,000 investment in the top 500 U.S. companies at 1 July 1993, when measured by the S&P 500 Total Return Index (in Australians dollars), would have grown to $176,155 by 30 June 2023. That’s a total compound return of more than 1,660% without an investor making any additional investments beyond the initial $10,000 in 1993, other than by reinvesting all the income distributions that they received over time.
A $10,000 investment in the Australian share market over the same time period, when measured by the S&P/ASX All Ordinaries Total Return Index, would have increased to $138,778 based on the same strategy of reinvesting all the income distributions. That represents a 9.2% per annum average annual return over the 30-year period, and a total compound return of more than 1,280%.
By contrast, cash has definitely not been the best place to be, especially for retirees relying on income generation.
The lowest long-term return over three decades has been from cash. When measured by the Bloomberg AusBond Bank Bill Index, a $10,000 investment in cash would have earned just 4.2% per annum and grown to $34,737.
Consider hiring a financial coach
If you’re really not sure about what to do now, or your overall financial direction, you could consider consulting a financial adviser.
You can liken a financial adviser to a personal financial coach, who can help you to make informed decisions throughout your investment journey.
The benefits of engaging with an experienced financial adviser are many.
Importantly, an adviser can provide you with a roadmap to help you reach your long-term investment objectives.
That roadmap should factor in your overall appetite for taking on investment risk, including times of greater market volatility.
One of the ways financial advisers can add value to your investment plan is by monitoring and periodically rebalancing the asset mix of your portfolio.
Together with a financial adviser you can review your investment plan to make sure it stays on track to meet your short- and long-term investment goals.
Whether you are budget conscious or seeking to maximize your earning potential, we have investment options to help grow your financial nest. Feel free to contact us at info@centrawealth.com.au or give us a call at 08 8231 4709.
Article courtesy of Vanguard.