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Sit tight and wait for the markets to bounce back

By unknown | Jan 13, 2009 | COMMENTS [ 0 ]

You read about it everywhere and the political situation is making headlines the world over.

You read about it everywhere and the political situation is making headlines the world over.

World markets are affected by political change and major events, but history shows that markets bounce back and a short time later are stronger than before.

Since 1940 there have been 10 major market drops due to some world crisis. The average loss taken over this period was 32,6 percent. It was a bitter pill to swallow, but had you panicked and exited the market you would have missed out on the recovery, which averaged 34,1 percent in the first year, 49,7percent in three years and 75,5 percent in five years. That would definitely have been a more bitter pill to swallow.

So stop following the herd. If you have clearly defined your investment strategy and your risk profile and tolerance, forget about what everyone else is doing.

When determining your investment strategy also take into account whether you require growth or income from your capital. Only when this has been decided can you decide on your asset allocation.

The most important part of the exercise is to educate yourself. I am not suggesting that youbecome an expert in all fields of investment but it is critical to understand what is being presented to you in developing your diversified investment plan.

Short-term thinking results in portfolio under-performing. A long-term investor looking for growth should realise that coupled with this is their time in the market, which, due to inflation and worldwide trends, should in my opinion be no less than eight to 10 years.

It is only over such a period that the sharp fluctuations, which can and will take place, will be ironed out. The real art of investing (other than asset diversification) is to identify value well before other investors and to be patient. If there was ever a time to sit tight and bide your time, that time is now.

Change is inevitable and the unexpected will require re-evaluation of your strategies. This might seem to be a contradiction to sitting tight. If your investment portfolio calls for changes due to the fact that it needs to be re-balanced in line with your strategy, then by all means go ahead. But don't make changes to investments simply because of what is written in newspapers and what is said on television and radio.

Think of the current situation as a change in season. In winter we cannot simply wait for summer and we have to be patient.

Understand that there are many external factors that will affect your investments and most of these are beyond your control. As any successful investor will tell you, the most important lesson they learned from their successors is that patience is number one.

l The writer is a director of Pioneer Financial Planning. Visit www.pioneer.co.za or e-mail help@pioneer.co.za.


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