These three common mistakes are easy to avoid. Making them could be costly.
Sharp downturns on global financial markets are always unsettling.
Recently and largely in response to growing fears that the United States is heading into a recession, share markets fell heavily before rebounding.
Share markets may remain volatile over the short term. But a key lesson is that it never makes good investment sense to be swayed by the day-to-day movements of share markets into making knee-jerk investment decisions.
Rash decisions made in response to short-term events will invariably have negative long-term consequences.
What’s most important is to have a long-term investment strategy and diversified asset allocation plan, and not to deviate from that plan, even when markets do fall sharply.
Three mistakes to avoid
1. Failing to have a plan
Investing without a plan is an error that invites other errors, such as chasing performance, market-timing, or reacting to market “noise.” Such temptations multiply during downturns, as investors looking to protect their portfolios seek quick fixes.
2. Fixating on losses
Market downturns are normal, and most investors will endure many of them. Unless you sell, the number of shares you own won’t fall during a downturn. In fact, the number will grow if you reinvest your funds’ income and capital gains distributions. And any market recovery should revive your portfolio too.
3. Overreacting or missing an opportunity
In times of falling asset prices, some investors overreact by selling riskier assets and moving to government securities or cash equivalents. But it’s a mistake to sell risky assets amid market volatility in the belief that you’ll know when to move your money back to those assets.
While past returns are not an indicator of future performance, they do give a fairly good indication of the differences in returns between different types of assets.
Shares are renowned for being more volatile than other asset classes, however they have typically delivered the best returns over longer-term periods.
Share markets invariably recover their lost ground over time. So the best strategy is always to stay on your course, irrespective of sudden market jolts.
What’s most important is to have a long-term investment strategy and diversified asset allocation plan, and to not to deviate from that plan, even when markets do fall sharply.
If you’re really not sure about what to do now, or your overall financial direction, you could consider consulting us.
This article has been reprinted with the permission of Vanguard Investments Australia Ltd. Copyright Smart Investing
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