Money
Issue No. 48 - August/September 2009
Don’t let times guide investment
by Tony Catt
Investors should remain focused on their long-term investment goals and strategies rather than being thrown off course by day-to-day turbulence in the share market.
Poorly informed decisions in response to the latest news reports are likely to be highly detrimental to an investor’s long-term financial wellbeing.
Investment decisions should be based on sound reasoning and quality advice, not on emotions. Investors motivated by fear or greed tend to sell shares after their prices have substantially fallen and buy after they have substantially risen.
An excellent way to eliminate emotion from investment decisions is to carefully structure a long-term asset allocation to see you through all market conditions.
In simple terms, this involves weighting a portfolio in various asset classes to best suit the investor’s personal circumstances - including their tolerance for risk. At times when some asset sectors are producing negative or poor returns, others may be performing strongly. With a proper and appropriate asset allocation investors can spread their risks and opportunities. This is the astute way to invest.
During the 20 years to 30 June last year, Australian shares produced the highest annualised return to 10.5% followed by Australian property securities (9.7%), Australian fixed interest (9%), cash (7.5%) and global shares (6.6%). These returns are based on relevant accumulation indices.
An investor’s portfolio should remain appropriately diversified for their circumstances, firstly between the various asset classes and then widely within each chosen asset class. A widely diversified share portfolio means an investor should not suffer a significant setback if individual stock prices fall much further than the overall market – a phenomenon we have certainly witnessed during the past 12 months.
Investors who sell all their shares at depressed prices and change to an all-cash portfolio will crystallise their paper los...
