Markets may be rational in the long run, but they often don’t seem to behave logically in the short run! Basing your decisions on volatile short-term market movements, which you have no control over, is a recipe for disaster. Afterall, the market is not going to recover tomorrow because you lay awake last night worrying about it, or postpone its recovery to when you have reinvested your cash!
Recent stock market returns have been poor, and it is perhaps not surprising that many investors are abandoning their investment plans. However, since we know that investor behaviour is more likely to destroy value than markets themselves, it is often best to ignore short-term noise, and rather base your decisions on the factors you do have control over. Here are a few aspects that are in your control, and that can help you achieve successful investment outcomes.
Know where you’re going and how you’re going to get there
Investing is like a journey. If you don’t know where you’re going, you’re unlikely to arrive at your intended destination. What’s your objective – is it a short-term goal like building up capital for a trip overseas? A medium-term goal, like investing for your child’s education? Or are you investing for retirement – a long term goal? Are you in the right investment product? Have you maximised your tax benefits? Or are you simply ‘staying safe’ in low risk, low return assets? The right route is the one that matches your objectives, so the answer will be different for everyone.
Keep your eyes on the horizon
If you’ve ever felt seasick on a boat, the best advice is to keep your eyes on the horizon. Don’t look at the waves as they crash around you, rocking you wildly from side to side. That’s a guaranteed route to getting ill. The same applies to investing. Don’t look at the daily ups and downs of the market or pay too much attention to the daily onslaught of bad news in the media. Remember your objectives and keep moving towards them. Making investment decisions in a panic can drown your financial ambitions and cause you untold damage in the future.
Take one step at a time
Many investors fall into the trap of inaction and complacency, or procrastinating until it is too late. If you want to reach your destination, however, you need to be an active participant on your investment journey. Don’t second guess yourself or beat yourself up for past investment decisions that went wrong. Rather focus on what you can control and do from this point forward, and ensure your plan enables you to reach your destination.
Know there’s always risk
In investing, risk can be your greatest ally – but it can also be your biggest enemy. Misunderstanding the investment risk you’re taking on – or its potential impact – can have a devastating effect on your ability to reach your investment destination. Be clear about what you’re investing in and why – and if you understand the risks, also understand how to manage it to your advantage.
Choose good travelling companions
A sure way to ruin a good journey is to invite along the wrong travelling companions. This is also true in investing. It can be tempting to listen to everyone’s opinion, but it is unlikely someone else’s route map is not going meet your needs. A trusted financial adviser can help you plan your route, focus on your long-term goals, encourage you to move forward, and understand the risks along the way. Investing in good quality advice often far outweigh the costs.