Market fluctuations can make it difficult for investors to remain calm and focused on their investment goals and sometimes your clients need to reminded about the some of the fundamental and timeless investment principles that can help them maintain composure through volatile times.
Diversification is the key
Diversifying your clients investment portfolio across uncorrelated asset classes reduces risk as all assets invested are less likely to underperform altogether. Generally, people are rewarded for taking some risk with their investment and assets such as equities and bonds have the potential to earn higher returns than cash.
Don’t follow the herd
Help your clients avoid this classic investment trap to ensure they make the most of their investment plan. Investors tend to become overconfident by buying high when markets boom, and leaving during a recession, thereby locking in their losses. Help your clients avoid acting on their fears and impulses. The worst ever 25-year return for US equities (including the Great Depression) was 5.9% annualised. Ensuring your clients patiently plan over an investment lifetime is a far more effective approach.
Find an ally in volatility
Understanding market cycles can help your clients avoid making rash, emotional decisions. Help them make an ally of volatility because the best years usually follow the worst. Treat this as a means to reassure your clients and advise them to find an ally in volatility. If an investor pulls out their money just after a market crash, they may also miss out on the market rally and therefore ‘lock in’ any losses. Instead of trying to pick the best time to enter and exit the market, a better strategy may be to sit tight and ride out market fluctuations.
Profit from dollar cost averaging
Investing on a regular basis can allow your clients to benefit from Dollar Cost Averaging. Dollar Cost Averaging works most effectively in volatile markets, allowing your clients to buy more units and increase their purchasing power when the markets are down, thus capitalising on volatility and making their money work for them. Price fluctuations can allow investors to maximise their purchasing power. Regular investing can help to smooth out market fluctuations and means that the average price paid per unit can be lower than the average unit price for that period.