Investment plan with a long-term goal is a life raft in rough times
The deck is stacked against individual investors and professional fund managers who try to consistently beat broad market indices through timing highs and lows
As investors we’re constantly told not to bother trying to time the market. Study after study shows the deck is stacked against individual investors and even professional fund managers who try to consistently beat broad market indices.
As no-one can predict the ups and downs of the markets accurately, the best bet is to invest and stay invested with a plan for a long-term outcome. This doesn’t mean simply doing nothing over many decades, but rather to have an investment plan that will act as a guide through tough times.
It was Mike Tyson, the former world heavyweight boxing champion, who said: “Everyone has a plan until they get punched in the mouth.” The same can be said of investing in the stock market. You’ll never really know if you’re made for it until you have survived a market correction or crash. Knowing this, the time to plan for that inevitable eventuality is not when the market is falling but before these events occur, so you aren’t surprised when it does happen.
A plan forces you to think about the level of volatility associated with the investment and to act in terms of an appropriate strategic asset allocation to manage that volatility.
Media commentary perpetuates a common misconception of the nature of volatility. While downward movement is simply a market decline, volatility is a sudden, sharp movement in either direction, and usually in both. Volatility is an innate part of the equity markets. One can even argue that it is the market, a natural reaction to human beings making decisions about stocks based on new information.
For many people that is unsettling, but it should be reassuring. It is reasonable to assume that big losses will be followed by big gains, and understanding that makes it much easier to sit through all the chaos without trying to pick tops and bottoms.
Attempting to move in and out of the market can be costly, particularly because a significant portion of the market’s gains over time have tended to come in concentrated periods. Many of the best periods to invest in stocks have been those environments that were among the most unnerving. When the market drops the value of assets drops as well, which means a larger number of shares can be purchased if investments are constantly made when the market declines.
Investors can spread the risk associated with specific markets or sectors by investing in different investment buckets to reduce the likelihood of concentrated losses. For example, holding a mix of risky assets (equities and real estate) and defensive assets (investment-grade bonds and cash) in a portfolio can help smooth returns over time.
Investing in low-cost, multi-asset funds provides asset-level and geographic portfolio diversification. These funds are constructed based on strategic long-term asset returns, with asset weights managed tactically according to expected conditions. Spreading investments over different countries can also help bring down correlations within a portfolio and reduce the impact of market-specific risk.
Don’t let market volatility cause you to veer off course from attaining your dreams. Establish a financial plan you feel comfortable executing and stick to it. If market volatility makes you nervous, this may be a good time to evaluate your investment strategy and find a more suitable asset mix. Market volatility is part of the investment process. Learn to enjoy the journey.
Consider partnering with a professional such as an investment manager or financial adviser. Working with a financial professional can help to create a plan that will meet long-term financial goals and objectives. This can also help to execute a hands-off approach to wealth management, as hiring a financial adviser can remove some of the burdens of managing and rebalancing a portfolio.
While one can never be truly objective regarding investment decisions, one can be proactive in ensuring those decisions are driven by data and process, as opposed to instinct and emotions.
• Luthuli is investment manager at Luthuli Capital.