How to Navigate Market Volatility?
Considering the recent market volatility due to the Omicron outbreak, the potential rise in interest rates as well as the Russian / Ukraine conflict, it is timely to share a few tips which may help investors navigate through investment markets during these uncertain times.
Think long term – if your investment objective is to accumulate for retirement over the long term, it is important to acknowledge that from time to time, investment markets inevitably rise and fall. If you invest in shares, history has shown that over the long term (say 20 years+), you are likely to be financially better off by continuing to invest rather than staying out of the market in fear of market corrections.
Stay invested – market timing is very difficult if not impossible. No investor has the perfect foresight of when to sell at market top and buy back after a crash when prices bottom. Attempting to time the market comes with the risk that you may miss out on the recovery. For instance, if you liquidated your Australian share portfolio in March 2020 at the onset of the COVID crisis and stayed out of the market, you could have crystallised losses and missed the spectacular recovery. The S&P/ASX200 lost >30% during Feb and March 2020 but recouped all its losses and gained more over the next 18 months.
Diversification – a diversified portfolio is a portfolio which contains different types of investments (such as Australian shares, international shares, real property, bonds, gold and cash, etc) and the returns from these investments are not expected to move in unison under different market conditions. The benefit of diversification is that the loss from one asset class may be buffered by the gain from another asset class in the portfolio. Therefore, a diversified investment portfolio could help you smooth out returns and reduce extreme swings in investment value because of market volatility.
Invest within your risk tolerance – by carefully mapping out your investment risk profile with your financial adviser and constructing your investment portfolio accordingly, you are less likely to panic during market corrections. This will reduce the urge to sell out your portfolio at an inopportune time.
Rebalancing – you should rebalance your portfolio periodically by taking some profit in investments that have risen in price and reinvesting the proceeds in quality assets which may that have fallen in value. Rebalancing is a “buy low sell high” strategy, as investing should be. Furthermore, rebalancing ensures that your asset allocation remains diversified and stays within your comfort zone (i.e. your investment risk tolerance).
Cash reserves – for those who are near retirement or in retirement, keeping sufficient cash (say to last 2-3 years) will alleviate the need to sell down the portfolio at inopportune times to pay for expenses. For those who are still working, keeping some cash allows you to top up your portfolio when prices have fallen and average down the acquisition costs of your investments.
If you wish to know how we can help you manage your investment portfolio, contact us at admin@japhiawealth.com.au.
GENERAL ADVICE WARNING: The above is general advice only and does not take into account your personal circumstances or objectives. You should seek your own independent financial and tax advice to ascertain whether and how the above applies to your particular situation and whether it is likely to meet your objectives, prior to making any financial and investment decisions.