There has been significant investment volatility & ‘noise’ in recent weeks from World Equity Markets. We hear about Brexit daily, Trade Wars between USA and China and potential interest rate hikes in Europe and the States. This can have a very unsettling effect upon investors who take a very short-term view in their outlook, trying to second guess the market. This is a game fraught with danger and is akin to a bet, rather than investment. The most successful investors ala Warren Buffett always play a long-term game, because that’s where the value and the real returns can be achieved.
“Cash is King” is a saying we hear very often, but in the current climate of historically low interest rates, cash has certainly gone down in the pecking order of playing cards. Whilst one would strongly advise to have circa 6-12 months of income in an emergency fund with ease of accessibility, but when it comes to long term investment needs, savers need to look somewhere else to get any sort of decent return on their funds.
When you are investing funds, it’s most important to follow a few key tenets, with diversification being at its core. Adherence to these simple rules will save an investor a lot of heartache and will significantly improve their chances of investment success over the longer term.
Don’t put all your eggs in one basket
Your cash needs to be ring fenced away from your longer term savings strategy. This longer-term investment strategy should be made up of a mix of assets such as equities, bonds, commercial property, alternatives and so on to provide as much diversification as possible. This gives the investor the best chance of achieving their investment objectives.
Establish your attitude to risk & volatility
How much risk and volatility are you prepared to take, to get a decent net return over the medium to long term? Obviously, this is dependent upon one’s individual circumstances. However, it is absolutely critical that an investor has a keen sense of their attitude to risk and how they will react if or when the investment reduces in value. They must thoroughly understand the nature of their investment and the capacity for that investment to fluctuate in value, sometimes significantly and the time frames required to get the return they seek.
Take the long term view
It is important to remember when you are investing to take the long term view. By this I mean have a time horizon of between 5-10 year. Stick to this time frame and don’t get distracted and anxious by any short term ‘noise’ in the financial markets. It is imperative that you avoid trying to time the markets. Trying to predict the sharp falls and rises in the markets is tantamount to playing Russia roulette!
In broad terms the younger you are, the more risk you can afford to take, because the time horizon is longer. It is prudent as you approach retirement that the risk profile in your portfolio should be dialled down to minimise the danger of large fluctuations in the equity markets seriously impacting on your portfolio. (Remember 2008!)
Conduct regular reviews
People’s circumstances change and life moves on, so it is important to review your portfolio on a regular basis at least once a year. There may be other investment opportunities to consider at your yearly review meeting or your circumstances may have significantly changed.
Consider drip feeding your investable savings into the market on a regular basis (monthly). This will significantly lower the overall risk barometer & volatility of your portfolio over the long term. During volatile times, this strategy allows you to benefit from what is known as ‘euro cost averaging’. The concept of averaging involves investing on a regular basis, usually monthly. This arrangement has a number of benefits to you the investor. It helps instill a sense of discipline in your investment habits; it avoids you having to second guess market movements and it averages the cost of buying an investment.
Tax efficient – Platform
Is it possible or feasible to put your investment(s) under one platform umbrella so as to avail of a possible tax offset on any gains and potentially any losses? The savings in tax under this Platform structure can be very significant.
Get expert advice
It pays in the long run to call on a professional impartial Qualified Financial Advisor who will carefully consider your financial objectives and put in place an investment plan best suited to your needs and circumstances.
Niall Rooney B.Comm.ACII.QFA.FLIA is a Financial Planning Manager with CityLife Galway – 087 2482639.