3-Steps to Investment Success
Dealing with Stock Market Volatility- Follow a Tried & Tested Investment Approach
- The Patience to Let Compounding Work its Magic
Dealing with Stock Market Volatility
Stock markets may have delivered a 9-10% per annum return over the long term (1900 – 2007) but there have been periods of strong returns - like the 1980s and 1990s - and periods of dismal returns - like the 2000s. The erratic profile of these returns is the number one reason why people make errors and often lose patience with their stock market investments. There are two ways in which investors can deal with this volatility.
The first approach to dealing with the volatility is to adopt a programme of investing in the stock markets over time, adding monies to your plan either on a regular or ad-hoc basis similar to how investing in your pension fund operates. It is always difficult (even for the pros) to say with confidence when markets offer good or poor value but by investing over time an investor can smooth out the journey. Of course, this approach will only suit investors who have time on their side. See our featured article on 'Regular Investing' for a demonstration of how a regular investor remained intact over the traumatic 2000-2009 period in investing history.
The second approach to dealing with stock market volatility is to try and time your entry into and exit from the markets to take advantage of the upswings while avoiding the downswings. This approach can be suitable for either lump sum investors or those close to retirement where a medium term investment time horizon is not applicable. For specific examples and a more detailed analysis see our section on ‘Market Buy & Sell Signals’.
When you decide to invest through the stock markets, you should ask yourself the following question – ‘Is my goal to accumulate capital or is it to protect the capital I already have?’ If you are at the stage of trying to accumulate some capital then you are more likely to be in the ‘regular investing’ camp. However, if you are trying to protect capital then ‘timing your entry to and exit from markets’ makes more sense.
Follow a Tried & Tested Investment Approach
In the stock markets, you can invest directly in a portfolio of stocks and shares or indirectly in funds. Whatever approach you take, ILTB advocates investing and not speculating and to understand the difference see our featured article on ‘Investing versus Speculating’
In terms of direct investing, ILTB puts forward a number of approaches to investing directly in a portfolio of shares in the UK, US and Irish markets using financial data alone. We show you clearly and unambiguously ‘What to Buy’ and ‘When to Sell’ the stocks in these portfolios. See the section on ‘Investment Approaches’ for more detail.
We also promote indirect investing through exchange traded funds and investment companies. For many investors, it is much more manageable to invest in equities, property, commodities and other asset classes via these types of listed funds, which have significant advantages over the non-listed variety (like unit-linked funds in Ireland, unit trusts in the UK and Mutual Funds in the US). We run a model global portfolio of ETFs and investment companies in the members section of the web site.
The Patience to Let Compounding Work its Magic
They say compounding is the eighth wonder of the world, and with good reason. If you can build up a sufficient lump sum where the income generated off that lump sum covers your out-goings, then you will have achieved financial freedom. As Robert Kiyosaki says in the book - 'Rich Dad, Poor Dad' - ‘you will in effect have freed yourself from having to work for money, as you have money working for you’.
The following is a powerful example of the power of compounding; a person who invests €2,000 per annum for only eight years from age 25 to 32 inclusive and generates a 10% annual return up to retirement age 65 will have a larger sum saved than the person who starts investing at 32 and puts €2,000 into his programme every single year up to age 65 and obtaining the same annual return of 10%. Compounding is the reason the first investor, who only contributed €16,000 into his investment programme, could have ended up with a greater lump sum that the second person, who contributed €66,000 into his investment programme but started a few years later. See our featured article on ‘The Power of Compounding’ for a fuller explanation.
Rory Gillen
The InvestR Centre
30th April 2009