Q: Given the record falls in the US market, I am extremely concerned about my exposure to losses in my Super and retirement savings.  What should I do given the current climate?

A:  There have been reams of material written debating whether this is a crash or a correction and how markets are likely to behave in the future.  The hyperbole in the media language certainly does not serve to provide an environment for a measured debate. My counsel to you is what matters is what decisions you make as an investor in the context of your own personal circumstances.

In a volatile market, it is often difficult to stay on track with your investment strategy. Before making any changes, here are some important factors to consider.

Are you trying to time the market? Whilst it can be tempting to jump out of the market when it is declining, investors who park their assets in cash often fail to recognise the time when the market begins to improve.  If you are investing for the long term, will you do more damage trying to time your exit and entry to the market? Failing to buy back in the bottom of the market can prove very costly and reduce the opportunity for future gains.

Has your appetite for investment risk changed or are you reacting to the environment or the sentiment of the market? If your risk appetite has changed, identify why it has changed; it could be your time frame for investing is now shorter, your circumstances have changed or you can’t sleep at night. Is your change a permanent sentiment change or is it a change based on how others are behaving or the current investment environment?

Has your investment time frame changed?  If it has, do you have the time for your investments to recover through the cycle? All Investment markets run in cycles, some are short-term corrections, some are medium-term business cycles of 3 to 5 years and others can be long-term secular swings of 20 years.  Eventually, they will revert.  The key is making sure your portfolio can weather the particular cycle and you have sufficient time to allow your portfolio to recover.

Assess the quality of the assets within your portfolio.  If they are direct shares, consider the short and longer term prospects of the company. Will they continue to generate a return to shareholders and will they grow? Be careful of trying to “catch the falling knife”.  Just because a stock price has fallen dramatically doesn’t mean it will recover the losses. Ensure the business you buy into is sustainable and able to weather a financial storm, whether now or in the future.

If you invest in Managed funds, are you comfortable with the investment approach of the Fund Manager and their approach to managing risk within the portfolio?  Have they been true to their investment philosophy and invested where they said they would?

In my opinion, most investors focus too much on chasing investment returns and not enough time considering risk.  If a company or a fund generates a higher rate of return, do you understand what risks you take as an investor to receive that higher return?

Very rarely does one asset class consistently outperform, “one year’s rooster may become next year’s feather duster”  The best performing asset classes will change so diversify your portfolio into a range of asset classes; shares, property, fixed interest and cash.

If investing in shares, diversify your portfolio by sector and company.  How concentrated is your portfolio in particular sectors such as banking and mining or exposed to one particular country (perhaps Australia)?

Volatility also provides opportunity.  Empirical studies have shown the value in long-term compounding returns and the benefits of regular investment through dollar cost averaging; investing a regular amount into a portfolio on a regular basis regardless of whether markets are rising or falling.

The sheer volume of information and opinion available in the media to the everyday investor has grown enormously in the digital age.  If your circumstances have not changed and the outlook for your investments hasn’t changed, it doesn’t hurt to tune down or turn off the flow of information that distracts us from our main game which is investing for our future goals.

Most investors already know that the best way to navigate a choppy market is to have a good long-term plan and a well-diversified portfolio. But sticking to these fundamental beliefs is sometimes easier said than done. When put to the test, you sometimes begin “doubting your beliefs and believing your doubts”.  This can lead to short-term decisions that divert you from your long-term goals.  Seek advice from a qualified professional.  That “sanity check” should provide you with a definitive answer to the future steps you should take under any market conditions.