Given the volatile conditions local and world markets have experienced over the past few months, it has understandably made a lot of investors cautious about their portfolios, and maybe considering making changes or selling investments.
Taking a step back for a second, for most investors, whether just starting out or trying to get back on track, the old adage is true — “Failing to plan is planning to fail”. So having taken the trouble to start planning, investors may panic when markets fall in value and potentially sell their investments at the worst possible time.
If you are having these thoughts, it is a good time to remember why you started saving — is it for you first home or wanting early retirement? Have your plans for these events changed? If not then why change your saving plan due to market movements?
The financial plan will be different for every person as it depends on your goals and dreams. But generally, an investing plan uses a disciplined approach that will allow you to accumulate the money you need over your lifetime to reach your desired goals. There will always be trade-offs for everyone depending on specific circumstances of life now and in the future. The important thing is to have not just a wish and a hope your dream might one day become reality but to have a plan that outlines the steps needed to achieve those goals.
So armed with your long term plan, what comes next? To put it simply, long term investing. Thinking long term opens up a lot more opportunities for investors. Trying to reach long term goals like retirement in one year is likely to leave you frustrated. Recognising that you must start saving as early as possible and understanding that it takes time to accumulate money is one of the major keys to investing. Now is always the best time to begin creating your plan and for many people starting actually means you are already half way to reaching your goals.
Unfortunately, many investors try to time the markets. Timing the market is not a long-term investment strategy. It’s a short-term investment strategy that tries to take advantage of dips in the market. The problem with this strategy is that by focusing on just when to invest, it’s easy to ignore your long term objectives and make investments you normally wouldn’t — essentially it diverts your attention from where it should be.
Average annual return
So let’s look at a long period of time and the effect it can have on investing. Thirty years equals about 11,000 days. One might assume that eliminating a few of those days would have little impact on investment performance during that time. Yet, if the ten best days of the S&P500 Index (the top 500 companies quoted on the USA stock market) for the period 1983- 2013 are excluded, the average annual return drops from 8.40 per cent to 5.80 per cent. If the twenty best days are excluded, the average annual return drops to 4.09 per cent. So missing 20 days over 11,000 can halve your returns.
If individual days can affect performance so dramatically, then why not be in the market for the good ones and out for the bad ones? Far easier said than done. Such a short-term perspective can harm performance and jeopardise your long-term financial goals.
Another common tactic during periods of market volatility and uncertainty is to park long-term assets in cash investments. While waiting on the side lines can sometimes seem the prudent strategy, it comes at a cost. Money market accounts may be less volatile than stocks and bonds, but they also offer little opportunity for growth and income. So, be brave, remember why you are investing, review regularly, and keep the long term plan in mind
By James Thomas
The writer is a Managing Partner at DeVere Acuma
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