Financial markets are full uncertainty. Barry Kerr gives a run down on what you need to know before investing
Financial markets are full of uncertainty and unless you have a magical ability to predict the future then there is no fool proof investment secret.
However, there are certain tried-and-trusted principles that can help investors boost their chances for long-term success. Here are just some of the fundamental concepts every investor should know:
Invest for the Future
We are all living longer, thanks to advances in medicine and healthier lifestyles, people are living longer lives. For example let’s take a 65-year-old couple today, there is a 50% chance of one of them living to age 90. Life expectancy at birth in Ireland today is 83.6 years for females, and 79.9 for males, back in 2003 these were only 80.5 and 75.6 respectively.
Cash is not King
Investors often think of cash as a safe haven in volatile times. But in the current low interest rate environment the return available on cash is effectively zero, leaving cash savings on deposit means your purchasing power can be eroded by inflation over time.
With interest rates expected to remain low (on March 7 the European Central Bank announced it was pushing out the timing of its first post-crisis rate hike until 2020 at the earliest) investors should be sure an allocation to cash does not undermine their long-term investment objectives.
The power of Compounding
Compound interest is often referred to as the eighth wonder of the world. It’s so powerful that even missing out on a few years of saving and growth can make an enormous difference to your eventual returns. The key message here is to start early and invest regularly.
Market Volatility is normal
Keep your head when all about you are losing theirs. Volatility in financial markets is normal and investors should be prepared for the ups and downs of investing, rather than reacting emotionally when the going gets tough.
Some interesting statistics worth remembering: Markets average at least one -14% decline each year, every five years or so market will experience a decline of 30%+, daily dips of 2%+ happen at least five times per year, markets rise on average three out of every four years.
Stay invested for long term
Trying to time the markets can be a dangerous habit. Market falls are notoriously difficult to predict and the periods of strongest returns often follow the worst returns. For instance, an investor who stayed fully invested in the S&P 500 Index from 1995 through to 2014, would've had a 9.85% annualized return.
However, if they missed the ten best days during that same period, then those annualized returns would collapse to 6.1% pa, that’s from just missing 10 days in a 20 year period.
While markets can always have a bad day, week, month or even a bad year, history suggests investors are much less likely to suffer losses over longer periods. Investors need to keep a long-term perspective. It’s about “time in” the market not “timing” the market.
Diversification does matter
“Never put all your eggs in one basket”, while this may sound like a cliché, it is particularly true when it comes to Investing. The last decade has been a particularly volatile period for investors, with a major financial crisis, political upheaval and natural disasters among some of the challenges they faced. Despite these difficulties, the worst-performing asset class over this period has been cash. Meanwhile, a well-diversified portfolio which includes stocks, bonds, property etc would have returned over 6% per year over this time period. A well diversified portfolio also provides a smoother ride for investors than investing in just a single asset class.
Barry Kerr CFP® is Managing Director of Wealthwise Financial Planning who have offices in Carrick-on-Shannon & Galway, www.wealthwise.ie All details and views contained within this article are for informational purposes only and does not constitute advice. Wealthwise Financial Planning makes no representations as to the accuracy, completeness or suitability of any information and will not be liable for any errors, omissions or any losses arising from its use. Wealthwise Financial Ltd T/A Wealthwise Financial Planning is Regulated by the Central Bank of Ireland #CI66141