In times of market volatility, it’s useful to remember a few grounding investment principles that can get you through the good and the not-so-good.
The best thing investors can do when markets are volatile is to stay invested.
Of course, that’s often easier said than done, especially when market commentators point to a market correction or when your portfolio is down for consecutive days or weeks.
For those new to investing, particularly those who jumped into the market when shares were booming last year, the recent market turbulence feels something like a rude awakening.
In times like these however, it’s useful to remember a few grounding investment principles that can get you through the good and the not-so-good.
Stick to your plan
Before you invest your first dollar, new investors need to have well-defined investment goals and a realistic investment plan. This means understanding how much money you have to invest, how much you can contribute regularly, how comfortable you are if that money goes down in the short-term, and how long you have to reach your desired outcome.
It’s easier to stick to a plan if you’ve got one written down.
Investors who fare best are the ones who don’t regularly tinker with their portfolio and are in it for the long-haul.
A good example of this is that during the COVID crash in March 2020, investors who stuck to their plan and stayed invested were able to reap the benefits of a swift market recovery. Those who cashed out at market lows lost the opportunity to regain portfolio value when markets picked back up.
Tune out the noise
Social media is rife these days with market commentary, stock predictions and portfolio strategies. Each corner of the internet will espouse a different investment philosophy, and while this might make for interesting debate, it can also be a little overwhelming for new investors.
In times like these, it’s not about disengaging from market information altogether, but rather about choosing what to listen to.
Investing can be emotionally charged at times which can lead to investors making impulsive decisions. So, when you’re struggling to decide who and what to listen to, first examine the source for credibility and bias, and then consider if the information is relevant before you take action (if any at all).
Remember, what might work for one investor may not work for the next as there’s a multitude of individual considerations (i.e. risk tolerance, investment confidence, timeframe, and objectives) that define an investor’s individual approach.
The best thing you can therefore do is to remind yourself of your investment plan, and the fact that no advice online has been tailored specifically to your circumstances.
Markets will consistently rise over the longer-term
For younger investors with a longer investment time frame, short-term market volatility is unlikely to materially impact long-term returns.
What might seem like a downward trend for markets right now is, importantly, only temporary.
Markets are cyclical, but history shows will rise over the longer term even when there’s been sharp falls in the past.
For example, a $10,000 investment in Australian shares 30 years ago would still have grown to $160,498 even with significant market downturns such as the Great Financial Crisis in 2007-2008 and the COVID-19 outbreak in 2020.
Vanguard’s annual Index Chart can serve as a good reminder to investors of the importance of perspective, and how sticking to a long-term investment plan, with diversification across a range of asset classes, allows you to grow your wealth even in the face of market crises and short-term volatility.
The above material has been reprinted with the permission of Vanguard Investments Australia Ltd