When the ASX plunged almost 40 per cent at the beginning of the pandemic all too many people would have sold their shares or moved their superannuation into cash.
At the time, it would have seemed like cutting their losses.
The world was going through a once-in-a-lifetime pandemic and millions of businesses were forced to close their doors.
But fast forward to today and it’s clear that those who did jump ship missed out on one of the best years in recent memory for financial markets – and they also crystallised what were previously just ‘losses’ on paper.
On a super balance of $100,000, that’s a gain of $20,000.
The New Daily brings this up not to pour salt in the wounds of those who missed out, but because it highlights the importance of looking past short-term volatility in financial markets and sticking to your strategy.
Or, as AMP Capital chief economist Shane Oliver put it in a note to clients on Tuesday, the need to “turn down the noise” and hold your nerve.
Dr Oliver said the key lessons from last financial year for investors were:
- To accept that sharemarkets are forward-looking, as this can help you to understand why share prices can rise even when the ‘real economy’ is struggling
- To realise that timing markets is hard, so you shouldn’t try to do this unless you’re a professional day trader
- To not “fight the Fed or the RBA” – even though interest rates are low, monetary policy can still affect investment markets in a big way
- To consider interest rates when attempting to value an investment, as low rates lead to higher price-to-earnings ratios
- To “turn down the noise” of the daily news cycle, so that you can focus on your long-term investment strategy.
Licensed financial adviser Craig Sankey, who works for Industry Fund Services, said even professional investment managers often get it wrong when trying to time the market.
He said the key is to develop a clear investment strategy so that when markets go into free fall you have a solid foundation to rely upon.
You can learn more about how to put together an investment strategy by reading this TND article on the six factors to consider when drawing up a plan.
And if you want to put together a longer-term plan for your superannuation, you should contact your super fund as most of them will provide free advice on what is the most appropriate investment option given your needs and personal circumstances.
“Because if you don’t have a strategy, you tend to adopt whatever’s floating around out there,” Mr Sankey told TND.
“So if you see the news and read the paper, and see things are bad, then all of a sudden that’s what you latch onto.”
The New Daily is owned by Industry Super Holdings