Worried About Your Retirement Investments? Don’t Panic Sell was published prior to the big drop in the markets on Tuesday.
Nevertheless its messages are still very relevant given further market weakness over the last week.
I like how the article starts with the behaviour economics aspect of market volatility. Unfortunately we feel the pain of losses much more than the pleasure of market gains. The 24 hour cycle of news headlines does not make the feeling of portfolio loses any better!
As the article highlights, equity markets are back to levels they were at a couple of months ago. Unless you have a portfolio of 100% equities (which is unwise in most circumstances – particularly if you are saving for a house deposit) your portfolio loses are unlikely to be as great as those posted by the equity market indices. The benefits of diversification.
Diversification does work. Having said this, the recent daily market activity has witnessed loses in both fixed interest (bonds) and equities on the same day. This is where allocations outside of equities and fixed interest such as alternative strategies adds another layer of true portfolio diversification.
The article makes the very valid point of having an Investment Policy Statement (IPS). This is a critical and important document. At times like this it is worth referencing this document, accessing appropriateness of goals, objectives, and long term strategic asset (risk) allocations. Of course this exercise should be undertaken formally and frequently (yearly) irrespective of market conditions. The continued focus should be on what needs to be done to reach longer term investment objectives. Outcomes should be measured against these objectives not market indices.
An essential component to adding value over time and increasing the chances of meeting investment objectives is to have a well-articulated and documented Rebalancing Policy. This assists in managing the risks that build up within portfolios over time, such that market movements like the recent one do not have an outsized impact relative to expectations and risk tolerance levels.
There are lots of other points to consider in the article, namely don’t try and time markets.
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