Nine rules for investors to keep in mind in troubled times

What rules work in times of crisis?

Why should you stay in the market?

Shane Oliver

These questions were answered in a recent Oliver’s Insight, by Shane Oliver, Head of Investment Strategy and Chief Economist at AMP Capital.

He explained….

When share markets and other growth-related assets enter periods of intense volatility, people tend to lose sight of the basic reason they invest their money in them in the first place: to take advantage of the power of compounding returns.

This is a fundamental rule for investing, no matter what the prevailing conditions, and in general it means you have to be in the market, not out, if you want to your investments to reach their potential.

For as long as we continue to live in interesting times, here are eight other rules to bear in mind and keep you focussed on those compounding returns:

Invest for the long term

Historically, one of the most reliable way to generate wealth from investing is to hold positions for extended periods of time, absorbing pull backs and building on long-term market growth.

Over the past 20-years, for Australian shares the All Ordinaries Accumulation Index has delivered annualised returns of 7.4%1  p.a. (before franking credits) despite three global contractions (the dot-com bubble, the 08-09 Financial Crisis and the current coronavirus pandemic).

Don’t get thrown off by the cycle

All asset classes generally go through good and bad cyclical phases.

Some cycles could be considered as short term, such as the occasional correction.

Medium-term business cycles could take place over three-to-five years.

Longer cycles could see secular swings over 10-to-20 years in equity markets.

There has been even the longer bull market in bonds which has occurred over 35 years since the early 1980s.

It’s important to try and avoid being thrown off well thought-out long-term investment strategies by cyclical swings in markets.

Of course, cyclical events can also create opportunities.

Turn down the noise

It can be easy to get caught up in panic and drama.

Try switching off the nightly news before the finance segment begins and watch some bad reality television instead.

Buy low and sell high

It seems simple, but too many people sell out of a position after a fall in the market.

For all the above reasons, it’s usually an incredibly bad idea, and can simply serve to lock in your losses.

Sharper Fall In Prices. OliverBeware the crowds

Shares tend to bottom out at the point of maximum bearishness.

Look for the bargains when everyone else is running for the exits and be wary of being late to move on a market rally.

Diversify

As the fallout from the COVID-19 crisis demonstrates, market turmoil falls unevenly across different stocks and sectors.

It’s a lot easier to accept market risk if you can minimise sector and company-specific risk through diversification.

Keep it simple

Don’t overcomplicate matters – focus on investments that you understand, and which provide decent, sustainable cash flows.

Finally, it’s never a bad idea to seek advice. There’s a lot to be said for a second opinion, especially from someone who has been through downturns before.

Guest Author: Dr Shane Oliver is Head of Investment Strategy and Chief Economist at AMP Capital. You can read the original article here.

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Apart from our regular team of experts, we frequently publish commentary from guest contributors who are authorities in their field.


'Nine rules for investors to keep in mind in troubled times' have 3 comments

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    July 23, 2020 MHarris

    ‘Nine rules for investors to keep in mind in troubled times.’ It is interesting to read this title inferring ‘troubled times’ in our economy when your articles infer that it’s generally business as usual and there won’t be much of a downturn, particularly in property, at all! It would be refreshing if we could eliminate sifting through the treacle of articles to find unbiased, factual information on the troubled times ahead or not, rather than more articles hyping up the status of the property market, playing down any real ramifications for 1 million newly unemployed. So my question to you is: ARE we in troubled times? Or AREN’T we? I would appreciate a balanced response as there are many in the media and online who simply don’t want the ‘truth’ about our economy to be told, for obvious reasons of the panic that may ensue. Thank you.

    Reply

      Michael Yardney

      July 23, 2020 Michael Yardney

      MHarris – this article was written by Dr Shane Oliver, chief economist of AMP and one of Australia’s most respected economists.

      At Property Update we publish a range of views from leading experts in their fields, so don’t be surprised that they are a variety of opinions.

      If somebody told you they were 100% definite what’s happening and what’s ahead I would be very wary of listening to them

      Reply

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    July 22, 2020 Ha Nguyen

    Thank you for sharing useful information

    Reply


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