Investors should focus on big picture

Keeping sight on your financial goals


Share market investors should be using this period of volatility in equity markets to ensure their portfolios reflect their financial goals, with some too preoccupied with daily market movements and losing sight of the bigger picture.

Investors need look at the composition and weighting of their portfolio, and whether it can achieve their financial goals over a period of time. A home deposit, for example, might be a three-year investment plan, so the portfolio needs to be reasonably conservative. If the goal however has a five to ten-year horizon, the portfolio requires a more balanced approach, such as having at least 50 per cent in shares and 50 per cent in secure investments.

A longer timeframe could therefore demand a more aggressive investment strategy, with at least 70 per cent in shares considered appropriate, as there would be sufficient time to recover from any corrections in the market.

Investors should review the historical performance of each investment asset class over time in better understanding the impact of volatility. This provides a degree of comfort to younger or less experienced investors who haven’t lived through the natural fluctuations of market cycles.

Other tips for investors in mitigating the impact of volatility include having a written investment strategy which includes asset allocation ranges with minimum and maximum levels.

Investors without a documented strategy are more likely to panic and revert to cash when a major market correction occurs. They then tend not to go back to the original investment allocation until markets have rebounded 20 per cent, locking in losses or destroying any capital.

Selling shares because of volatility isn’t a sound investment strategy and is instead a means of losing money. There are plenty of reasons to sell a share but volatility and market falls shouldn’t necessarily be viewed as a catalyst in selling.

Professional investment advice is recommended, and investors should consult with their financial adviser in tailoring a strategy for their personal circumstances and goals.

This article was first published in the Spring 2022 issue of Financial Times.  

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