Market uncertainty is a good incentive to review your investment strategy
When considering your investment strategy, keep in mind that portfolio asset classes have a much greater impact on investment returns than the individual assets within each class. Determining the weighting assigned to each investment category is therefore crucial.
Investment market categories broadly include Australian equities, international equities, real estate, infrastructure, high yield debt, fixed interest and cash.
Short or long term?
When determining appropriate asset class selection and weighting, start by considering your investment goals and objectives.
If the goal is to use the money in a few years, such as for a home deposit, the investment strategy and asset classes should be very conservative. You want to avoid seeing an investment market correction that will reduce a large portion of your savings, just when you need cash.
If your investment goals are long-term, such as building wealth to live on in retirement, your attitude toward investment risk may be more aggressive. Assets such as stocks and property are more likely to generate long-term returns relative to inflation than more stable assets such as fixed rate cash investments.
Staying ahead of inflation is a key factor for long-term portfolios to maintain their real value.
Risk levels can be further increased with strategies such as borrowing to invest and/or buying more speculative investment styles.
Diversification is also key to a good investment strategy because it helps reduce risk, which is especially useful for those who are retired or approaching retirement.
This includes decisions such as the use of managed funds (not just direct investments such as stocks and individual properties) and the allocation of invested markets (such as international stocks in addition to Australian stocks, and commercial property in addition to residential).
Diversification can also include buying shares of smaller companies in addition to shares of larger companies, either directly or through managed funds.
Adding to your portfolios over time can further spread risk levels. There will be times when you buy when the markets are low, but also when they are high. Over time, this will balance out.
More importantly, sticking to a long-term investment strategy allows the mathematical marvel of compounding to kick in. Over time, as the value of assets increases, the level of income and growth tends to increase in dollars. A 5% return on a higher value asset brings more money into your portfolio than a 5% return on a lower value asset.
That can mean putting up with a lot of noise along the way. Investment markets are spooked by issues such as the war in Ukraine, federal elections, rising interest rates and COVID-related hurdles.
But quality investments and proper asset allocation will trump long-term portfolios. Having a carefully planned investment strategy can help dampen the noise.