A recent question on my News Corp Gen Y column was how to deal with market volatility.
It′s a very relevant question for most investors, because in terms of value, pretty much the only market that doesn′t move up and down is cash. But with the official cash rate at a dismally-low two percent and the average 12 month term deposit rate not that much more, you′re barely breaking even after inflation and tax by having your money in a cash investment.
So for those wanting capital growth, market volatility (markets moving up and down) can be a necessary evil. Here are my tips for managing the fluctuations.
- Be patient. Market fluctuation, by itself, isn′t an issue provided that you don′t need to use your money in a hurry. Over time, fluctuation tends to smooth out, so if you can invest for the long haul (several years) then short-term volatility won′t keep you awake at night. If you know that you′re going to need that cash in a year or two for a house deposit/overseas trip/university course, though, then investing it in a volatile area can be a recipe for disaster.
- Be calm. There′s a saying that financial markets are driven by two things: fear and greed. Greed kicks into play when a market is shooting the lights out; but when markets fall, some investors get scared. Against all evidence they assume that this is D-Day. So they pull their money out and crystallise their loss. Be calm in the face of hysteria and remember that you′re invested for the long term.
- Be savvy. There′s no use flogging a dead horse. Or following a share all the way through to receivership. So intersperse your patience and calmness with a good dose of realism. Thoroughly understand the investments you′re putting your money in to and know when to call it a day.