It’s been a dicey few weeks for stockmarket investors, with global markets hit by sharp downturns in late October. Although there’s since been somewhat of a recovery in November, the volatility may not be over yet, with market-watchers monitoring this week’s US mid-term elections to see if the poll outcomes rock stocks any further.
Dominic Alafaci, managing director at Collins House, an independent financial advisory firm, told Starts at 60 that his gut feeling was that markets would be flat for a considerable period after the recent turbulence, but that, regardless, the nerve-wracking gyrations demonstrated why it was essential for all investors to assess their own risk profile and invest accordingly, and, if possible, to maintain a cash buffer.
“We advise clients to have two to three years’ worth of income in cash and short-term deposits so they don’t have to worry about the other money they’ve invested as it fluctuates,” Alafaci says.
But if an investors’ assets are invested entirely in stocks, should they be concerned? And is there a way to temper the losses those investments may suffer? Those questions were at the top of Starts at 60‘s readers’ minds. Jim Kilkenny, a long-time investor and Starts at 60 money expert, had some answers.
Q. We’re so scared about our superannuation given the recent drop in overseas markets – we lost a lot of money in just one week. The television commentators say we won’t recover our losses from such a crash for seven years, but we just want secure savings. How can we secure our super so we don’t keep losing money?
A. As a retiree myself, I am also concerned about the value of my investments but I know that the cashflow from my investment portfolio is much more important than daily price movements – even large negative ones. You only lose money “on paper” when markets decline. It feels uncomfortable but it only becomes a loss if you panic and actually sell.
Television commentators create ‘noise’ as they have to say something about market movements to keep their jobs. Absolutely no one can say with certainty how long it will take for markets to recover and in my experience, commentators are usually wrong in their predictions. Remember ‘bad news sells’.
If you are getting good advice and have a good mix of investments and a focus on cashflow, it is normally best to ignore such declines as markets typically recover over time. If your portfolio is properly diversified, there should be no need to sell assets which have fallen in price.
On the contrary, when markets fall the right advice is often to buy the asset class which has fallen in value and not to sell.
Q. What’s the best strategy in falling markets to protect what assets you have invested in shares?
In falling markets, the temptation is often to sell the assets that are falling in value to stem the losses. This behavioural reaction is “hard wired” into our brains. Humans put much more focus on avoiding losses than making profits.
Shares are by nature a longer-term investment that will experience sometimes quite large price movements (up and down). More return means more risk. The best strategy to protect your exposure to shares is to ensure you always have a portfolio diversified into all asset classes (cash, fixed interest, property and shares) and regularly (at least once a year) review the proportion you hold in each asset class. As share prices go up, the proportion in shares as part of the total portfolio goes up and you should consider reducing the exposure to shares.
Similarly, as shares prices go down you should consider adding to your exposure. If you follow this approach, you can ignore short term movements as the regular re-balancing of your portfolio reduces your risk. A good, unbiased adviser can be a great help in this process and can greatly reduce your anxiety about market movements.
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