When you read headlines about Australia’s rising unemployment or the slowdown in the mining boom, it’s easy to lose confidence in investment markets. But there’s a lot to be gained from ignoring the background noise and sticking to your long-term goals.
Confidence can have a positive impact on most aspects of your life. Whether it’s at work in job interviews or pay negotiations or at home as you tackle a challenging new project.
With confidence, everything seems more achievable. And your investment goals are no different.
The last five years in investment markets have made it difficult for some people to invest with confidence. But that doesn’t mean it’s no longer possible. Confidence is all about having a positive attitude, and most importantly, being well prepared.
So what are some of the principals to becoming a more confident investor?
When you see investment prices dropping due to the latest piece of bad news, it’s a natural reaction to think you need to do something before it’s too late. However, selling investments during or after a market downturn inevitably means missing out when prices pick back up again – which can happen quite quickly.
For example, the Australian shares ASX/200 index dropped by 40.4% in 2008. But the following year they gained 39.6%1. If you sell in a downturn and eventually buy your investments back, you may be paying more for those assets than you sold them for.
Having an investment strategy that you’ve put in place with your financial adviser means you’re focussed on the end goal, not the fluctuations along the way. This can help you stay calm and confident when others are panicking.
Don’t assume ‘this time is different’
Investing in growth assets like shares and property will always come with some risks, and there will always be the potential for negative performance. But over the years, the overall trend has been consistently upwards.
Between 1993 and 2012, the Australian share market only experienced four negative years out of 20. The average return for Australian shares over that period was 9.9%pa¹.
It can be difficult to see the upside when there’s a lot of ‘doom and gloom’ in the media. But investment markets have survived the Great Depression and two World Wars. This resilience should give you confidence to persevere with your long-term plans.
For those with capital to invest, a simple and comparatively low-risk way to invest is to ignore the rises and falls of the market and keep investing at a steady pace. You might buy at a higher price one month and a lower price the next.
The strategy is called ‘dollar cost averaging’, and it can substantially reduce the risk of entering the market with all of your resources at the wrong time.
Your financial adviser can help you work out how much of your monthly budget you can afford to put towards your long term investment goals – including how much you can invest in the tax-effective superannuation environment (bearing in mind your contributions caps).
People have different ideas of what ‘long-term’ means, but it’s probably longer than you think.
Take James and Claire for example. James is 50 and Claire is 45. He can reasonably expect to live to 86, and at that time Claire’s life expectancy will still be six years. This means that at age 50, James and Claire are likely to be investing for the next 42 years!
Your financial plan needs to be flexible enough to cater for your short-term goals, your spending needs in retirement, and your long-term aged care needs. This is something your financial adviser can help with.
Cover all your bases
The ideal way to ride out the lows and highs of the investment markets is to develop a comprehensive financial plan that covers your investments, superannuation and insurance.
For example, you may find that investing inside super is an effective way to reduce the tax you pay on dividends and capital gains – which are taxed at a maximum of 15% inside super instead of your marginal tax rate when you invest outside super.
Life insurances can also play an important role in protecting your family against a serious illness or accident. With this additional financial support, you can be more confident that your long-term plans will survive an enforced period out of the workforce for you or your partner.
Spread your risk
Your financial adviser will show you how to diversify your investments so that when one class of assets goes down (e.g. shares), another may well go up (e.g. bonds).
The key is choosing a mix of investments that suits your goals, your attitude to risk and where you are in your life, and then sticking with these investments through the market highs and lows or until your objectives change.
A diversified approach across Australian and international shares, bonds, property and cash investments will reduce your exposure to any one asset class, and it can be easily done through a managed fund.
Once you have a financial plan in place, the job isn’t done. New rules and regulations come along regularly – particularly in superannuation. And new investment opportunities will always emerge.
The best way to ensure you’re making the most of these opportunities is to review your financial plan regularly with your financial adviser. With their ongoing support and advice, you can be a confident investor in all market conditions.
1. Vanguard Investments Australia – Asset Class Tool