When markets are volatile, it’s essential to have an effective plan of action in place. Below are 7 steps successful investors take during these times that involve discipline, strategy and most importantly, patience.
#1 – Understand how Everything Works
It is crucial that you understand how everything works together, as well as what the key drivers of market movements are. This will help you determine what is noise and what is substance, and when markets have overstepped boundaries.
#2 – Make the Necessary Mental adjustments
On average, yearly returns for Australian investors in a standard 70% growth / 30% Defensive portfolio have generally been quite strong since the GFC ended. During 2012 and 2013, real return rates reached mid to high teens, so it’s understandable why valuations become costly and upside return potentials decrease.
It’s important to remember that markets don’t always go up. What is currently being experienced is known as gravity. Investors who make the right mental adjustment to a lower return outlook will be the ones who don’t chicken out of their strategic investment plans.
#3 – Diversify Intelligently
There are several benefits to diversification. However, it’s essential to keep in mind that diversifying by ‘name’ varies from diversifying by ‘risk characteristics.’ For example, just because something is labeled as an equity exposure and something else a bond exposure, it doesn’t mean that either will provide you with a diversification benefit when most needed. When markets become volatile, investors must understand their actual contributions to their portfolio risk that any investment attracts. Genuine diversification is the key.
As a result, it’s recommended to seek out alternatives with lower correlations to standard assets like bonds and shares, while also exercising caution regarding which risk buckets you allocate traditional assets to. For example, are you placing high yield bonds or hybrids into your defensive or growth bucket?
#4 – Stick with your Initial Plan
The way in which your wealth plan or strategic investment is constructed is crucial. It must be aligned in such a way that you are able to achieve your long-term goals, while also being consistent with your risk tolerance and preferences. It must be robust throughout changing market cycles as well.
Once this is all in place, your approach to market fluctuations will be driven partially by the timeframe that has been used. Strategic planning will help enable you to achieve your long-term objective, so it’s essential that you not undermine your efforts with impulse short-term decisions.
#5 – Keep Cash on Hand – Volatility can Equate to Opportunity
Volatility can be a blessing or a curse. Although few enjoy the feelings it brings when viewing their returns, it can also bring about ideal opportunities to build-in extensive longer-term returns. Even if returns happen to be ‘on average’ lower in a large volatile range, patient investors know it’s essential to keep cash on hand. This enables them to take advantage of opportunities that come up when markets head downwards.
#6 – Remain Close to Strategic Allocations – Large Bets are Less Rewarded
Volatile environments consist of a lot of noise, especially in data-driven markets like that which is presently being experienced. Performing large strategic allocations in these markets can be deadly.
The noisier the market environment is, the more investors must step back and comprehend how a market movement appears with respect to various timeframes. In some cases, a move might look big in a tactical timeframe, but virtually insignificant in a strategic timeframe. Investors must ensure that they not make large allocation shifts based on strategically insignificant movements.
#7 – Security Selections within Specific Asset Classes is Key
Remaining close to strategic allocations doesn’t mean not doing anything. In a market where the combination of market and macroeconomic fundamentals doesn’t provide strong either way at the asset class level, there are still several opportunities for generating extra return inside several asset classes.
Tactical asset allocation within predetermined risk limits and strategic asset allocation addresses shorter-term opportunities and risks. Active security selection places an additional layer to a strategic asset allocation return, and it’s especially crucial when markets are being driven more by macro factors than by security-specific fundamental.
Keeping these points in mind will help ensure that you don’t respond emotionally to market movements, which means that you will develop a firm foundation for long-term investment success.
Of course if you don’t want the worry or don’t have the interest or time then we would be happy to assist you in selecting a diversified fund where the fund managers do all the work for you. Call us on 03 9848 5933.
****Source: Russell Investments