In a recent edition of Oliver’s Insights, Dr Shane Oliver outlined his top tips for investing during times of uncertainty. Given the rough and tumble of today’s economic climate, we thought it was worth taking a look at these tips to see how they affect our own Wealth Management clients.
1. Use the Power of Compound Interest
Consider this: One dollar invested in Australian cash in 1900 would be worth $236 today. Invested in bonds, it would have grown to $877. However, invested in the Australian Stock Market, it would be worth a staggering $559,281. Although the average annual return on Australian shares is only double the return on bonds, it is because the shares are subject to compound interest that the return is significantly higher. Wealth can grow exponentially through compound interest and the longer the investment is held, the better the returns.
2. Be Aware of the Cycle
Investment markets – including bonds, shares and property– constantly go through good and bad cycles. Some are short-term, some are medium-term and some much longer. Accept these cycles. While some may cause short-term problems for investors, others create opportunities.
3. Invest for the Long-term
History shows those that invest for the long-term are more likely to make money. A long-term plan that suits your level of risk and tolerance of volatility means you can ignore the day-to-day movements of your investment and instead focus on the long-term results. If you can’t afford to take a long-term approach, consider investing in funds that target a particular goal.
4. Diversify
Putting all your eggs in one basket can leave you exposed to a low return (or worse if something goes wrong in the share). Instead, look to diversify your investment across different asset classes. This will lessen your exposure to a single economic event so, if something goes wrong, you won’t lose all your money.
5. Turn Down the Noise
After working out the investment strategy that’s right for you, it’s time to turn down the noise. Ignore the sensationalist news stories of economic doom and gloom and the opinions of friends and family. Instead, maintain your focus on the long-term.
6. Buy Low, Sell High
If you are buying or selling, try to buy when markets are down and sell when they are up. In a nutshell, the cheaper you buy an asset, the higher its prospective return will likely be and vice versa.
7. Beware the Crowd at Extremes
You don’t always have to follow the crowd. While sometimes the crowd is right, at other times (especially when at extremes) they can be wrong. The problem with crowds is that eventually everyone who wants to buy, does. After that, the only way is down. As Warren Buffet once said “be fearful when others are greedy and greedy when others are fearful”.
8. Focus on Investments Offering Sustainable Cash Flow
If an investment looks too good to be true, it probably is. Avoid anything that is hard to understand or is based on obscure valuation measures. Instead, look at investments that generate sustainable cash flows (such as profits, rents and interest).
9. Seek Advice
When it comes to investing, the best advice is to seek advice. Edney Ryan’s experienced team understand the complexities of investing. They combine best-in-class financial management expertise, reporting and research, with personalised service, customised advice and full transparency.
For more information or to discuss your investment strategy, contact Kate O’Brien on 02 9908 9888 or email wealth@edneyryan.com.au.
Kate is an Authorised Representative of Hillross Financial Services Limited (AR Number 1007833).