Investing for your future takes discipline
History shows that moving in and out of investment markets in order to minimise losses and maximise gains is a guaranteed money loser. The table below illustrates the returns received by investing in US stocks over the last 10, 20 and 50 years. If you had tried to time the markets during these periods and missed the market’s best month in each year you would have greatly diminished your return.
Years |
Average annual return on the S&P 500 |
Average annual return if you missed the best month of each year |
Last 10 years |
11.8% |
5.6% |
Last 20 years |
12.7% |
4.9% |
Last 50 years |
9.7% |
2.5% |
As you can see, getting your investment timing wrong can have a significant impact on your returns. With the multiple forces that affect global investment markets and create short term investment uncertainty, accurately predicting the highs and lows is notoriously difficult. Over the longer term, investment markets do appreciate but you need to remain invested to benefit.
So what is the best course of action in uncertain times? Investing for your future takes discipline. To help you weather market turmoil you should structure your investment portfolio with your long term goals in mind - building a retirement fund, a new home, your children’s education - and stay focused on these goals. Maintaining a long term view will help you ignore short term fluctuations in the markets.
Diversifying your portfolio, that is spreading your funds across different investments and markets will also protect you against the unexpected. Effective diversification will produce a superior and more consistent investment performance over time, which will make it easier for you to stick to your strategy.
As part of your investment strategy you should also set some rules in advance about when you buy or sell an investment and be sure to review this periodically and when conditions change. These rules will help you avoid the temptation to react to the ups and downs of the market in times of uncertainty.
The fact that financial markets continue to rise and fall in response to short term events will never change. What you can control however, are the decisions you make in response to market movements.
Stay calm, diversify, don’t act impulsively and you are well on your way to achieving your goals.
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