Every market cycle provides opportunities for us to improve our investment process. The best thing to do is learn from what happened in the past and apply those lessons to your future investment strategies and circumstances. Here we share our top five investment lessons from the recent market volatility and Global Financial Crisis (GFC).
When markets are volatile, it's easy to react emotionally; whether through overconfidence in rising markets or, equally, reacting with fear in falling markets. However, we know that the best way to reach your financial goals is to remain cool and stick to your long-term investment strategies. History has shown us that markets tend to recover just as quickly as they fall.
The markets can be tough on your nerves yet, despite this, it's important not to focus on the short-term ups and downs of investment markets when considering your longer-term financial objectives.
For example, if we cast our minds back to the GFC, the Australian sharemarket fell 39% in 2008 but gained 38% in 20091. Investing is still the most prudent approach to beat inflation and help realise your long-term financial objectives.
1. S&P/ASX 300 Accumulation Index
No-one can predict for certain which asset class or sector will outperform the others. The key is to diversify. Trying to pick the best performing asset class of the year is very risky, considering that one year's best performing asset class can just as easily end up as the next year's worst performer.
We believe a sound, well-diversified portfolio with a long-term focus will help reduce volatility and provide steady, consistent returns over time.
While short-term market falls are hard to ignore, it's essential to stay invested. In fact, staying focused on your long-term investment goals is more important than ever in a market crisis. If you remove your investment during a down market, you run the risk of not benefiting when markets rebound.
This we know: markets follow cycles of ups and downs. What we don't know is their timing or duration. For example, the Australian sharemarket doubled in value between 2002 and 2007, suffered a setback in 2008, recovered in 2009 and is now under pressure once more. The point is that markets have always recovered.