Yachtsmen, like investors, love smooth sailing. But just as periods of rough seas are a sure thing out on the water, there are times when investors face inevitable periods of market volatility.
Having recently completed another Rolex Sydney-Hobart yacht race with the crew on my yacht ‘Balance’, I can honestly say the comforts of home never feel quite as good as when I returned from Hobart. The open ocean can be a hostile place, and Bass Strait is notorious for dishing up volatile conditions. When the seas are rough, the boat bangs around, there’s very little sleep to be had, and at some stage everyone cops a soaking. These downsides have to be managed carefully, and the key to charting a course for what can be a very risky journey is thorough preparation.
It’s the same for investors. It’s impossible to predict what 2017 has in store for asset markets though it’s a fair bet at some point we’ll experience bouts of volatility. Good preparation can make a valuable difference here too.
One of the most effective defenses against uncertain investment markets is a diverse portfolio – in other words, spreading your wealth across a variety of asset classes. The availability of managed funds, and low cost exchange traded funds listed on the Securities Exchange, makes it a lot easier to build a diverse portfolio even if you don’t have a lot to invest.
Another important strategy is developing and sticking with a long-term investment plan. Having a plan in place provides a roadmap to follow, and that in itself can be very reassuring when asset markets are jittery.
Your long-term plan will also shape the overall look of your portfolio – in other words, how your wealth is diversified. As we age for instance, it can make sense to shift part of your portfolio into more conservative assets. But with an average life expectancy of 80-plus, it still makes sense for many retirees to have some exposure to growth assets like shares.
Partnering with experts can also help when it comes to navigating uncertain markets. Let me say that you can build and protect your wealth by yourself, but most of us find it more efficient to do what we do best and consult with others for assistance if we need it, and that’s where a good financial adviser can help.
A sensible way to use an adviser is not to be totally dependent on their skills but to develop a relationship where you both have an understanding of your plan and your goals. That way your adviser can be of great assistance in selecting, monitoring and fine-tuning your investments as the year unfolds.
Paul Clitheroe is a founding director of financial planning firm ipac (now known as AMP Advice), Chairman of the Australian Government Financial Literacy Board and chief commentator for Money Magazine.