Hold on for the ride
Planning ahead by David Raits

The past six months have been a roller-coaster ride for investors, particularly for share investors.
One might expect this sort of high volatility to continue for some time and therefore it’s time to remind ourselves of the benefits of a disciplined and long-term approach to investing.

It is vital that your asset allocation (the way you spread your money across the differing asset classes, such as shares, fixed interest, cash and property) suits your risk profile and investment time frame.

But both should remain largely unaffected by the sorts of things that are happening in investment markets at the moment.

Instead they remain intrinsic to your personality and personal situation. Issues to consider include how much longer before you leave the service, the year you want to retire and the sort of lifestyle you want.

Abandoning growth assets, such as quality shares, after their recent drop in values would be a recipe for poor long-term returns.

But neither should you be complacent. Recent history has highlighted that the day of the bull market is over and so is the day of easily achieved high returns from a standard portfolio of shares or managed investments.

The US share market, the key driver of the ongoing bear market, may fall even further to reach levels where these lower valuations could be seen as normal in the current economic climate.

Some markets and investment strategies are better positioned. A portfolio of well-selected investments can still be expected to deliver sound investment returns. Such a portfolio could include quality mainstream managed investments and also less well-known managed investments from boutique fund managers.

These investments in both traditional and alternative assets areas should deliver sound investment returns compared to the risk associated with this type of portfolio over the longer term.

A mainstream managed investment is managed by a company that is characterised by being larger, usually with a well-known brand name and reputation – Colonial First State, Perpetual, JBWere, etc. These companies offer a broad range of managed investments across most of the asset classes.

The boutique investment manager is smaller in terms of funds under management, often operating in a specialist area or asset class – property, international shares, smaller companies etc. Boutique firms tend to have a stronger reliance on the quality of their people rather than the strength of their brand.

So how should you review or adjust your investments in response to these difficult market conditions?

The well-worn cliché that threats create opportunities holds true in investment markets.

While many of us are longer-term investors and should stick with our long-term strategic asset allocations, it may be the right time to consider buying into some asset classes that have performed poorly (such as local and overseas shares) while their prices are low.

One strategy would be to sell some of your better performing assets (taking some profits) and directing the funds into other areas – that is, making an additional investment and purchasing additional units in a managed investment at a lower price.

This is a form of what is known as dollar cost averaging that can lead to increased returns over the longer term. Such a strategy also reduces risk by preventing the portfolio from becoming overexposed to one area as a result of differing market movements.

While the turmoil experienced in investment markets during the past six months might have been unsettling, such an environment provides a useful learning experience for investors.

In the good times it’s easy to forget that investment markets can indeed be volatile, and that we need to remain disciplined and focused on our longer term financial goals while continuing to regularly review our investments.

• David Raits is a financial adviser and proper authority holder of CIS Financial Services,a licensed dealer in securities and part of Snowball Finance Group Ltd.
  

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