Sound Investing Principles

Many people who own a portfolio of shares closely follow the daily financial news to see how much they made (or “lost”) the day before. But it might be argued that those prices are really only important if you are about to sell your shares.

In practice with shares in particular, it’s easy to be distracted from the big picture by short-term noise – temporary market down turns and sensational media headlines.

A look back at history

Remember 2001? The ‘dot-com’ crash, September 11, Iraq war and threats of terrorism caused share markets to head down and they stayed that way until March 2003. Some investors bailed out into the security of cash and bonds, just as they did during the Global Financial Crisis of 2007–2009 and more recently with the Eurozone debt crisis. Secure, yes, but with low returns. Cash and bonds may provide psychological comfort in turbulent times but a change in strategy can destroy your ability to generate long-term wealth – not to mention achieving low returns when interest rates are at historical lows.

Putting your faith in just one asset class is also a danger. Some investors saw direct property investing as a secure strategy. Then the property boom came to an end and the resources boom took over. With resources now slowing down, some investors are wondering “what’s next?”

You just can’t time the market consistently

In turbulent times it may be tempting to change strategy to protect yourself from short-term losses. Unfortunately, being out of the market may mean missing out on the market recovery and subsequent gains.

Share prices are driven by supply and demand. Good economic or company news attracts buyers who push prices up. Conversely when the news is bad, prices fall. The major traders of shares are fund managers, banks, superannuation funds and other large institutions. They focus on the future and try to predict where share prices are heading – and as we all know, predicting the future is impossible.

Over the long term the trend is definitely up but knowing when is not easy. In theory, you should buy in the troughs and sell at the peaks - but only hindsight gives you that option.

Timing the market is difficult. You just can’t pick the turning points. A better strategy is to stay invested to benefit from the upward surges. Share markets usually reward the patient investor.

Back to the future

Another wealth damaging strategy is to switch to an asset class that is currently performing well. This often means investors are buying at close to the top of the market. The best wealth creation plan is to:

  1. Assess your goals,
  2. Set a strategy,
  3. Invest according to the strategy,
  4. Stick to the strategy, and
  5. Review periodically to ensure your goals haven’t changed and your investments still suit your strategy.

Setting up a long-term strategy is one of the many ways a licensed financial adviser can assist you in order to benefit from the market over time.

Contact us so we can show you how you can absolutely minimise the risks of investing in the share market.