Perspective is something which all investors need to have whether markets are climbing and particularly when markets are volatile. The following article will outline how having perspective can help you ride out market volatility and ensure you remained disciplined to your long-term investment strategy.
The importance of perspective
Perspective is defined as a particular attitude towards, or a way of regarding something; a point of view, and it is something that investors need to have throughout their financial journey. What this means is that investors need to look at the big picture. Investors often lose perspective when they become worried about the value of their assets, or they become complacent about their returns during market booms.
Historical Performance
One way investors can ensure they retain their perspective is by understanding and reviewing historical performance. Although, past performance is not necessarily and indicator of future performance, it is important to understand that markets are cyclical, and volatility is an inevitable characteristic of investing in the stock market.
Over the 2021-2022 financial year, the ASX suffered a 10.2% loss with utilities losing 2.9 per cent, energy declining by 2.5 per cent and materials falling by 2.8 per cent. Similarly, the S&P500 experienced its worst start to the year since 1970, falling by nearly 12% over the 21-22 financial year. Staying in the tech-centric, Nasdaq also saw a decline of 24%, with the top 50 companies in Asia also feeling the impact by market volatility and are down 24.12%.
However, it is not all doom and gloom, and it is important that investors look at the bigger picture and remember how these markets have performed over the long term. Over the last 30 years, the ASX has provided investors with an average annual return of 9.7% p.a., with the S&P500 delivering an average annual growth rate of 10.7% p.a. The top 50 companies in Asia, have also over the last 10 years generated average annual returns of 10.75% p.a. Thus, investors need to remember that declining market conditions and volatility is an unavoidable part of investing and instead of responding to short term noise, this is when it is most important for investors to take a long-term approach and appreciate the bigger picture.
Adopting the right strategy
During these times, investors can respond by ensuring their portfolio is balanced, well-diversified and exposed to a degree of risk which they are comfortable with. Investors can also maximise their returns by adopting a dollar cost averaging strategy. Dollar-cost averaging refers to the process of investing in smaller, fixed amounts regularly over a longer period of time instead of in one lump sum.
This approach allows for greater discipline and certainty as it provides investors with more structure instead of trying to rely on when the market has plummeted or peaked. Another advantage of this strategy is that when markets fall, only part of your investment is exposed to this decrease and not the full amount that will be invested at the end of the period. In conjunction with this, during a downturn, the same amount of money will buy more shares or units for that month.
Discipline and the long-term view
Although it may be tempting to sell down your investments to cash to avoid seeing a drop in the value of your assets, having perspective will encourage you to stay invested and remain disciplined to your investment strategy. Howard Marks once said that, ‘The biggest investing errors come not from factors that are informational or analytical, but from those that are psychological.’ This means that many mistakes are made when investors act irrationally or are driven by their emotions which can often be fuelled by the constant media coverage of market conditions which may make things seem worse than they really are.
If this sounds like you, you may benefit from engaging with a financial adviser that acts as a financial psychologist and helps to prevent you from making mistakes that can cost you down the track. If you would like to ensure your investment strategy is appropriate for you and stands the test of time, please click here to organise a complimentary 20-minute consultation with an EPG Wealth adviser.