The volatility that we’ve seen in investment markets in recent months is enough to test us all. With the values of our superannuation (on paper at least) going up and down (mostly down in more recent times), we, as investors, are being sorely tested.
The decisions we have made regarding our tolerance to risk
Making decisions that are irrational or emotionally charged, may do immense damage. Madhu Veeraraghavan, Professor of Finance at Monash University, and interviewed in The Australian (31/8/11), argues that investors who allow their emotions to dictate their investment decisions will certainly loose money. He says that although it can be tough to control our investing emotions, it is within our power. When we are faced with an impulsive urge to act due to an abrupt downturn (or upturn) in markets, he advises we ask ourselves a series of questions:
- Why did I buy a particular share or managed fund in the first place ? Did I commit to doing so as a long term investor and was there some “science” or research behind my decision ?
- Has anything changed ?
- Am I basing my decision to sell (or buy) based on research or some emotional response ? [be honest with yourself……..]
- Am I allowing myself to get caught up in some prevailing market mood ?
- Would I make better decisions if I received professional guidance ?
- How would selling (or buying) impact my long investment objectives ?
In the same article, a quote from a leading fund manager is of interest. They say “…Investors often live to regret decisions made in the time of panic because they all tend to run for the exits at the same time.”
The ‘Cycle of Market Emotions’ is one of the most important road-maps for investors. It shows what happens to share prices as they move through periods of boom and bust, of rise and fall and of periods of calm and volatility:
At turning points in the share market, market fundamentals such as earnings and employment growth are usually changing more dramatically than sentiment.
Many investors who were counting on a healthy super balance to enable them to retire (or at least move to a shorter working week) will be disappointed with the recent returns from investment markets – although company dividends have been generally quite positive (particularly after franking credits) and term deposit rates are generally well ahead of the current inflation rate. Nonetheless, if we’ve had even low exposure to shares and property in recent times, we would have been disappointed in the short term. An option for those nearing retirement may be postponing retirement for a time – allowing us to work and save more and delay the draw down on our super until things recover.
Focussing on the things you can control is often a good strategy. Using a checklist that focuses on the “control-ables” will help. Ask yourself:
- Am I taking maximum advantage of the concessional tax environment found in the super system ? [here, there may be opportunity to bring some assets into a low or Nil tax environment and to contribute to super in a more tax effective way]
- Am I in investments that are right for my age, my time frame to retirement and my tolerance to risk or am I in a default investment option ?
- Am I taking maximum advantage of Government incentives and tax rebates ? [here, there may be an opportunity to receive money from the Government to help you]
- Am I managing my super and share portfolios in a tax efficient manner ? [here, there may be opportunities to reduce the tax you are paying]
- Can I move to a lower fee environment (without sacrificing the features that are important to me) ?
- Would I benefit from talking to someone who has specialist knowledge in this area ?
In summary, knee-jerk reactions will do us no good and most likely only inflict further damage. We need to go back to basics and revisit the reasons for our earlier investment decisions and we need to focus on the things we can control.
Contact Harvest if you wish to check your investment profile against the investments you actually hold.
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