When it is your retirement savings account that is heading down a steep incline it takes a particular form of discipline by investors to stay on board. Unlike the strapped in rollercoaster rider, investors have multiple options to head for the exit door. A few clicks on a website and the stomach-churning anxiety can be brought to an end.
At least for the short-term.
There is no doubt this past week's market volatility will have unsettled or troubled many investors. The market opened last week at 5160.60 (S&P/ASX300 index) and closed at 5,207.9. In between those two points in time investors were bombarded with the 24 hour news cycle and screaming headlines that trillions of dollars have been wiped from share values.
In periods where market movements seem to imitate the path of a particularly unpredictable rollercoaster, it pays to remember some time tested investment principles.
Volatility and corrections are common and should be expected from time to time.
Investors need to appreciate that turbulence in investment markets is normal. However, periods of stable, steady growth - while welcome - tend to lull us into a sense of false stability.
For example a market correction is generally defined as a drop of 10% or more. On average investors should be prepared for that type of volatility every 18 months or so.
Tune out excessive market noise to remove the emotion from investing.
Making short, knee-jerk changes to your investment plans rarely works over the long term. Times like these when markets are particularly volatile and reacting to short-term events are when the real value of having a written financial plan is obvious.
The simple act of documenting your long-term goals and setting an appropriate asset allocation are good ways to remind yourself of why you are investing and help keep you on course.
It is also when a professional adviser can demonstrate real value. Good advisers do some of their best work - although not always appreciated - when markets are volatile because they can help investors tune out the emotional responses by talking through the long-term objectives of your financial plan.
Market shifts can work in your favour.
Would you rather buy something when it is at a premium price or when it is on discount?
As previously discussed in Smart Investing, one of the hidden strengths of the Australian superannuation system is that it deducts money from pay packets and invests it over a long period of time. In effect making it a large dollar-cost averaging system, meaning that at times you will be buying on market dips, which lowers the average price you pay for the underlying investments.
In business and in life there is a lot of focus on taking action, getting things done, making changes.
But if you have a broadly diversified portfolio and a financial plan that has taken into account your goals, time horizon and risk comfort level, the inaction plan may well be the smarter course of action.
Source: Robin Bowerman for Vanguard Australia www.vanguardinvestments.com.au