More answers to other common questions
- What is investment risk?
- How does investment risk correlate with market cycles?
- What can you do to protect your investment against market volatility?
- How does diversification assist during periods of market volatility?
- Will this market volatility last?
- It is important for investors to spend time in the market instead of trying to “time” the market. What does this mean?
- What are the risks associated with selling/ switching your assets?
- What can you do during a period of uncertainty?
- Do you need to be concerned about your investment?
- How do you know if you are in the right investment option?
1. What is investment risk?
The main principle of investing is that the more volatile or risky an investment is, the higher the long-term return may be. For example, growth investments such as shares and property are generally considered to have higher volatility in the short-term but they are also likely to deliver higher returns in the long-term than cash and fixed interest.
Investing is about maximising your earnings over time and by ensuring that your investment strategy reflects your tolerance for risk and helps you achieve your long-term financial objectives, you should not need to react to short-term market movements but focus instead on what your investments are doing for you over the long-term.2. How does investment risk correlate with market cycles?
Investment markets move in cycles and it is impossible to predict when a market will rise or fall. During periods of volatility, investing can feel like a bit of a ride, as investment performance will typically move with the markets. However, one thing we know from looking at the historical performance of sharemarkets, is that they have always recovered and gone on to reach new highs.
3. What can you do to protect your investment against market volatility?
Your best defence against market volatility is always a well-diversified portfolio. That’s because the gain or loss on any one individual investment is just a small piece of your overall investment. Russell's investment philosophy is based on diversification at three levels: MULTI ASSET MULTI STYLE MULTI MANAGER™. These three levels of diversification have proven to reduce the risk of under performance and provide more stable returns – particularly in volatile markets.
4. How does diversification assist during periods of market volatility?
Diversifying your investment portfolio helps to minimise investment risk. This involves spreading your portfolio across different asset classes to reduce your dependence on the performance of a single asset class. For example, a balanced portfolio is made up of 70% growth assets (e.g. Australian shares, International shares and property) and 30% income investments (e.g Fixed interest and Australian cash).
5. Will this market volatility last?
While the markets have been relatively stable over the past six years, volatility is actually a very natural part of the investment lifecycle. The important thing is to focus on your long-term goals. Reacting to short-term fluctuations in the market could in fact place you in a less favourable position for the long-term.
While returns may be lower this year, it is important to put this downturn into perspective. One thing we know by looking at the historical performance of sharemarkets is that they have always recovered and gone on to reach new highs.
6. It is important for investors to spend time in the market instead of trying to “time” the market. What does this mean?
It may be tempting to exit the market during times of volatility or to move your money to less volatile investments such as cash, but there is a risk that you could potentially miss the best performing months or even the market’s recovery, which could actually put you in a worse financial position in the long-term.
So by staying invested for the long-term, you can ensure you are invested at the time when there is maximum potential for growth.
7. What are the risks associated with selling/ switching your assets?
Whilst you may think you can minimise your losses buy switching your assets, attempting to time the market is one of the riskiest approaches you could take at this time. When markets are volatile they often rebound in a very short period of time. By switching your investments in a volatile market you risk selling low and realising your losses and then missing opportunities for growth if the markets rebound.
By switching to something more conservative, you could also increase your exposure to inflation risk. Inflation risk erodes the buying power of your money and reduces the value of your income and assets. Inflation risk is particularly relevant when you invest most or all of your money in cash and fixed interest investments.
8. What can you do during a period of uncertainty?
How you react to this volatility can make a difference to the money you have saved for your future. So stay calm and remain disciplined. It’s understandable that you may be feeling anxious when the sharemarket is down, but overreacting to the current market climate by moving your money to less volatile investments, could actually cause you to be worse off financially in the long-term.
9. Do you need to be concerned about your investment?
If you are just starting out or are in the middle of your working life, you have a long time to keep investing money for your future and are well-placed to take market ups and downs in your stride. When the markets are ‘low’ they may present great buying opportunities which in turn will create greater opportunities for future growth.
If you are closer to retirement and plan to access your super in the next few years, there is no need to be alarmed. You still need to rely on your retirement savings for up to 30 or 40 years from when you stop working. So it’s likely you’ll need to keep your super invested for many years to come, giving you time for markets to recover. Keep in mind that you also continue to benefit from concessional tax treatment in the super environment and once you turn 60, any money you take out of your super is tax free.
Similarly, if you are transitioning to retirement or in retirement, there are still many years ahead for your savings to remain invested. In addition, new Government rules also mean you can keep your savings in the super system indefinitely, so you don’t need to make a hasty decision.
10. How do you know if you are in the right investment option?
Knowing whether your investment options are the most appropriate for you can be difficult, so we have designed a investor style quiz that can assist you in determining what type of investor you are and which investment options might best suit your needs and investment timeframe.
The result of the quiz will provide you with a general indication of what type of investor you are and will help you to make an investment choice which reflects your investment style and risk tolerance.