Many of us have probably received in our in-boxes spams for get-rich-quick-schemes with promises of making great amounts of money, effortlessly. If only getting rich was so easy.
Rather than pipedreams being sold by spammers, here’s a list of 5 investment principles that have stood the test of time.
1. Asset allocation is very important
Asset allocation – how you spread your money across various asset classes like shares, bonds property, infrastructure and alternatives – helps to balance the risk and return potential in your investment portfolio, anchoring it through different economic and investment cycles. It’s a key driver of long-term investment performance.
By including multiple asset classes with investment returns that move up and down under different market conditions within a portfolio, an investor can protect against significant losses. This is because, historically, the returns of the major asset classes have generally not moved move up and down at the same time.
By investing in more than one asset class, you’re likely to reduce the risk that you’ll lose money and your portfolio’s overall investment returns should have a smoother ride. If one asset class’ investment return falls, you should be in a position to counteract your losses in that asset class, with potentially better investment returns in another asset class.
The process of determining which mix of assets to hold in your portfolio is a very personal one. The asset allocation that works best for you at any given point in your life will depend largely on your time horizon and your ability to tolerate risk.
2. Diversification matters
The practice of spreading money among different investments to reduce risk is known as diversification. Through diversification, the overall performance of your investment portfolio isn’t overdependent on the performance of a single asset class or any single investment.
By spreading your money across a group of investments, such as in your super fund, you should be better able to limit losses when financial markets are volatile, and reduce the fluctuations of investment returns without sacrificing too much potential gain.
Asset allocation, along with diversification, is important because it can have a major impact on whether you’ll meet your financial goals. If you don’t include enough risk in your portfolio, your investments may not earn a large enough return to meet your goal.
For example, if saving for a long-term goal, such as retirement, most financial experts agree to including at least some ‘growth investments’, such as shares, for example, in your portfolio.
On the other hand, a portfolio heavily skewed towards shares would probably be considered inappropriate for a short-term goal, like saving for a holiday or buying a car.
3. Higher returns come with higher risks
Risk is unavoidable when investing. No discussion of potential investment return or performance is meaningful without also considering the level of risk involved.
If you want the potential to earn a higher return on your investments, then you have to be willing to accept more risk or volatility (ups and downs in the value of your investments). But investment success isn’t always about chasing higher returns by taking on relatively high risk – it’s about finding the right balance between risk and return that works for you.
An aggressive investor, or one with a high-risk tolerance, is more likely to risk losing some money occasionally, in order to get better long-term results.
A conservative investor, or one with a low-risk tolerance, tends to favour investments that will preserve their original investment. Conservative investors are concerned with a “keeping bird in the hand,” while aggressive investors seek “two in the bush.”
4. Your time horizon can influence your investment choices
Your time horizon is the expected number of months, years, or decades you will be investing to achieve a particular financial goal. An investor with a longer time horizon may feel more comfortable taking on a riskier, or more volatile investment because they can wait out inevitable financial market ups and downs.
By contrast, an investor saving up for a near-term goal, would likely take on less risk because they have a shorter time horizon.
5. Time in the market is more important than trying to time markets
All financial markets, including share markets, have good days and bad days. From this, it might be assumed that the key to successful investing is simply to be invested on all the good days and not invested on all the bad days.
It sounds tempting, but very difficult to do consistently and successfully, even for investment professionals.
Consider the fact that market timing entails two decisions. One decision is regarding when to get into the market whereas the other decision is regarding getting out of the market.
Getting just one of those two decisions right is difficult enough. Getting both right is a very tall order.
Market timing can be costly
One of the biggest costs of market timing is being out when the market unexpectedly surges upward, potentially missing some of the best-performing moments.
The opposite of market timing is staying invested with a long-term view as the market goes through its cycles.
Here’s something to consider: a hypothetical investment of $US1,000 in the global share market as measured by the MSCI ACWI index, made in 2010, would have grown to $US2,060 by the end of 2019.1
But if an investor missed the 30 best trading days of that period, they would have lost 99% of that return; and missing the 40 best trading days in that period would have seen the investor with a smaller amount than the original investment.
This emphasises the importance of patient capital – giving the market, in this instance, the global share market, time to grow your money rather than trying to pick the best time to invest. Even experienced investment professionals find it difficult to accurately and sustainably time markets.
One more thing
Sitting down with a financial adviser can help you will all aspects of investing, including investing your super.
If you have questions and would like your financial situation to be evaluated, please email us on firstname.lastname@example.org with your contacts, for an exploratory meeting, at our cost, not yours.
Article Source: https://www.mlc.com.au/personal/blog/2021/06/5_top_investment_truths