Being cautious or afraid of losing money is sensible; the problem is when the fear causes you to be paralysed into doing nothing. Far too many people continue to sit on the sidelines and have abandoned the stock market completely having been badly burnt.
Many “invested” aggressively, often without a full understanding of the risks involved and the possible consequences.
Investors are most vulnerable when emotions come into play. When markets nosedive, many “investors” bail out, when the markets remain undervalued, they do nothing, and when the markets begin to recover and start to soar, they regain their confidence, jump on the bandwagon and dive back in and the cycle continues. It is important to understand your money personality.
Instead of investing your money in stocks or in real estate, do you find comfort in putting all your money in the bank guaranteed investments even though you are likely to earn interest at very low rates? If you are totally
risk averse, you can expect very little prospect of real growth, as money market investments hardly keep apace
with inflation making it a challenge to achieve ambitious financial goals.
Depending upon your particular circumstance, your age, time frame and your overall financial plan, consider putting at least some portion in the capital market; this does offer the best prospect of real long term growth.
Set yourself clear goals
The best way to navigate the investment environment is, before you put any money down at all, to have set goals in place and a clear plan on how to achieve them. Your plan will provide you with direction on the most appropriate way to invest your money.
Where you have set clear, concrete goals that you are working towards, you will not be easily swayed by short term market volatility, as your focus will largely be on accomplishing them; these may include funding your children’s education, making down-payment on your new home, or preparing for your retirement.
Seek professional advice
It is important to seek professional advice, particularly where you don’t have the time, expertise or inclination to manage your own investments. Not even the most skilled investment advisors in the world could have protected investors from the most recent losses suffered globally, but an experienced team with a good track record can dispassionately re-examine your investment goals, time frames, risk tolerance, and your current
financial situation and structure an appropriate savings and investment plan for you.
Don’t depend solely on your investment advisor; make every effort to build your knowledge of investing. There is a plethora of information all around you in the print and electronic media. Take advantage of this.
Think long term
One of the best ways to build sustainable wealth is to take a long-term view of investing; this is probably one of the most important pieces of investment advice there is. It is important to keep your overall perspective in view and not be destabilized by the vagaries of the market. When you focus on the long-term you will avoid taking drastic unplanned actions in response to short-term news, rumour, events and emotions, which to a large extent influence the ups and downs of the market.
Sound, well thought out investments, held over a long period will usually weather turbulence, as a good long-term investment plan should anticipate both good times and bad. Investors should be in a better position to ride out any short term volatility without being forced to sell at a loss.
“Don’t put all your eggs in one basket”
It is tempting to concentrate your available funds in just one or two investments that appear to be doing very well, but this can be very risky. Build a diversified portfolio across asset classes including stocks, bonds, cash, and property. If one investment performs badly or fails, a variety of different types of investments are less likely to.
If you plan to invest, it is important to separate your short-term savings from your long-term funds. Try to estimate your cash needs and where they will come from for say the next two to three years. Are there some large school bills looming or are you planning to retire within the next two to three years? If you have enough cash in the money market to tide you over any volatile periods, you will not be forced to liquidate investments
prematurely to provide cash to meet ongoing cash needs or in an emergency.
The money you can afford to put away for a long period of time would be appropriate for equities, and other assets with potential long-term growth. Mutual funds from reputable financial institutions are an ideal option and particularly attractive for those with smaller parcels of funds to invest, as they offer both a diversified portfolio and professional management.
If you are afraid of investing at the “wrong time” adopt a cost averaging strategy. Instead of trying to time the market, invest on a regular basis in an appropriate vehicle, and even when your finances are stretched.
It is a particularly useful tool in a volatile market as you can reduce the average cost of your shares by purchasing more shares when prices are low, and fewer shares when they are high. A consistent disciplined approach takes away the speculative element of investing and reduces stress and fear.
Learn from these unique times; the challenge for us all is to be realistic about our expectations of the market and our investment returns. If you set reasonable long term profit expectations for your investments you will be more accepting of the inevitable periods of market upheaval.
If you stay the course, and continue to build upon the foundations of a sound investment strategy, you can achieve your financial goals.