5 Principles of Investing That Will Keep You On Track

Financial decisions always make one feel stressed.  Are you doing the right thing, should you have done something differently or might you have been better off not making that move… many questions linger in one’s mind.  To top that up 2020 has been an awfully difficult year with the global economy being more volatile than ever before.

It is very natural to feel uneasy with all that is going on in the world.  Volatility is always unsettling but it is also an opportunity to grow: financially or mentally.  This is the time to test your skills at staying cool, calm and collected.  At times when you feel the worry pressing in on you, take a step back and review these 5 principles of investing to put yourself at ease.

1. Keep your emotions in check

2. Don’t try to make estimations on the markets

3. Focus on your long term goals

4. Make the most of diversification

5. Don’t lose sight of the big picture

Keeping emotions in check:

Finance and investments appear mathematical but when it comes to managing one’s own money the math may be overpowered by emotion.  This is especially true during volatile times when markets are making unpredictable moves.  At such times the stress is usually topped up with speculations and ambiguous news in the media.

This emotional state of mind will lead you to make mistakes - the 101 of investing says you should buy low and sell high but at volatile times it is very common to show knee jerk reactions and sell to avoid “ further” loss creating a real loss when compared to sitting out the storm.  

At times like these you must not forget emotions are the reason for irrational investment decisions and you must think twice or even three times before making any moves.

Trying to make estimations on the markets:

During volatile times one key thing to remember is that past performances are not indicative of the future performances.  These times are after all extraordinary times with a lot of irrational behaviour going on. If you try to time the markets it is a strong possibility that you may be wrong and this will set you back in your investments.  

Sometimes doing nothing is the best option, to make the decision of doing something or nothing you must keep your emotions in check.  If you really would like to do something, sound advice in such situations would be to add small amounts into your investments to lower your total costs and increase your profitability for the long term.  

Don’t forget that it is only normal to feel intimidated by the fluctuating prices and that you are not alone.  Try and distance yourself from all the hustle and bustle to remain calm and avoid falling victim to speculations.   

Focusing on long term goals:

The media will always be full of news on rising and falling markets, don’t let this get to you.  Remember your objectives, be it for retirement or for your child’s education, focus on your long term goals.  The unreliable and unpredictable short term and news on this will only lead you away from your goals.  

History has always shown that reasonable investments into reliable assets have always caught up with their true value once the fluctuations are over.  They may be “U” charts or “V” charts, sitting out the storm - if you do not have any sums to contribute during the lower periods - doing nothing and waiting for the worrisome days to be over is your best option.

The luxury to be able to “do nothing” during these volatile times is possible with a bit of planning.  Make sure you always have some “emergency cash” set aside so you do not have to tap into your investments during times of uncertainty.

Diversifying investments:

If you had all your eggs in one basket, the volatile market situation is probably a more stressful situation for you.  Don’t let this memory be short lived.  To avoid such situations consider diversifying your portfolio to be able to better manage risk in the future.  Let this be a learning experience for you.  Once the storm is over, consider different types of assets based on your risk appetite and balance your portfolio accordingly.  

The big picture:

With technology playing a big role in our lives we have become accustomed to instant gratification.  We can do online banking, shopping, holiday planning, food ordering and so on - everything is at our fingertips.  We have forgotten to be patient.  

We definitely need to remember how it felt to be patient when life was not so fast.  Especially to not lose sight of the big picture when it comes to our financial plans and investments.  Even those who consider themselves very disciplined and calm may have an adrenaline rush during uncertain times.  

It would be safe to rephrase the wise words of Warren Buffet from: “The stock market is a device to transfer money from the impatient to the patient” to “volatile markets are the time when money is transferred from the impatient to the patient”.

Morningstar’s Gamma Research shows that making sound financial planning decisions can generate 29% more income on average for an investor saving for retirement.  The same research also shows that the interpersonal side of advice, which includes personalisation and behavioural coaching, can be the most valuable aspect of a financial adviser.  Do get in touch with us to talk on your future goals and how we can help you get there.