Q: I am extremely concerned about my exposure to the share market given the start to 2016. What should I do given the current climate?
A: 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 any future gains.
Has your appetite for risk changed? If it 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 short term factors such as markets?
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 existing portfolio. If they are direct equities, 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.
If you invest in Managed funds, are you comfortable with the investment approach of the 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?
It is important to diversify your portfolio into a range of sectors and companies. 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”, which can lead to short-term moves 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.