The power of “average”
When financial markets experience volatility, many investors obviously worry; but what are the real effects of a “volatile market”?
If you are a long-term investor, with a timeframe of five years or more, you cannot afford to overlook the benefits of growth investments such as shares or property. As an astute investor you will be aware of the fact that the value of these assets will vary over time – both up and down. However, if you have purchased a sound asset, whether it is shares or property, the price will generally rise over time.
When you invest in growth assets it is important to accept that you should be targeting an average rate of return. Some years you may achieve returns well in excess of your target, while in other years the return may be lower, and sometimes negative. If your targeted average is achieved over the longer term you will meet your objectives.
It is also important to note that different asset classes will outperform in different years. This is illustrated by looking at five major asset classes over the 10 years to June 2018. Occasionally the asset class which outperformed in one year showed a poor, or even negative, return the following year. This illustrates the importance of having a diversified investment portfolio covering all the major asset classes.
Financial Year Returns for major asset classes:
|Listed Property Trusts (Aust)||Australian Shares||International Shares|
Source: Vanguard Interactive Index Chart.
- Don’t chase bubbles. When you see financial markets rising rapidly it is tempting to chase the latest “hot tip”. Invariably it is these that fall the furthest.
- Seek professional advice to choose appropriate investments for YOU. These should have been well researched for their financial soundness, whether they are individual investments or managed funds.
- Be sure to have a portfolio which is diversified across major asset classes and subclasses. The balance of the portfolio should be designed to achieve your long term objectives at an acceptable level of volatility.
- Try not to panic. It is human nature to be concerned when you see the value of your assets fall. However, markets eventually recover and a sound investment will perform over the longer term. Selling during a downturn will not help you achieve your objectives.
- Review your portfolio at least annually to ensure it is still appropriate to your objectives and market conditions.