The investment horizon is never really certain. However, the current global economic climate is definitely more uncertain than before. Economies throughout the world are battling to create employment and dig themselves out of the debt. Doubt, fear and worry loom. Yet the markets are performing at all time highs pointing to hope and expectations which, frankly, do not align with economic fundamentals. This all adds to further uncertainty. So how should you approach your investments in these uncertain times?
Be realistic with your expectations
Past performance is not a prediction of future performance. Yes, looking back through a rear view mirror is pretty accurate. However, predicting the future is pretty well impossible. So, understand how your investment achieves its return and measure this reasonably against future expectations. If the share market. for example, relies on a a healthy economy, then it stands to reason that future returns should be better. However, the converse applies. You cannot reasonably expect double digit returns when the economy is benign.
Time in the market
Firstly, you need to decide on how long you intend to invest for. The basic principle being that the longer your horizon the more risk you can afford to take. Risk is found in the share markets where historically you receive higher returns than the other asset classes. Shares are bought in expectation of profits made by companies which are passed onto the investor in the form of dividends. If companies make consistently high profits over time then investors are prepared to pay more for the shares. However, there is a problem. The share market is driven by emotion and speculation in the short term and this often defies the fundamental view. Case in point, the current economic condition of our planet and the all time high performance of our stock markets.
Spread your investment
Once you have your time horizon established then you should consider your options. Look at a balanced fund approach. Take two or three unit trust funds that offer a flexible balanced objective. These fund managers make the calls for you deciding on where and how much to allocate to various options. If you choose a few funds then you get the advantage of different styles and choices from different points of view. That’s a lot of attention on your money.
Investing a lump sum in the markets in times like these is very risky as you have a strong possibility of loosing capital. If you lose 50% of your money you need 100% to get back to even. Who knows what the new normal returns will be into the future? It could take years to break even.
A safer way is to spread your investment into your new funds over time. The longer the period the less risk. Choose to keep your money in cash and then phase in over 6 to 12 months to avoid any severe loss of capital. If the markets correct during your phase in then you can take a position with the remaining balance at a discount. If you save on a monthly basis then you benefit from a bearish falling market which, if sustained for a long period, will mean that you will be buying discounted shares for a while and benefiting when the valuations pick up again. It’s all about preparation and patience in the end.
A word of caution. Don’t be lulled into the expectations of your investment based on the past fews years. Be realistic, understanding that there is a long way to go before the world gets back to normality and the returns in the new normal will probably be more benign than the performances of the past. At the moment cash at 7% is more certain than other assets. So not a bad option for the time being.