Wednesday, July 14th, 2010
Investment markets move in cycles and it’s difficult to forecast when they’ll rise or fall. Moving your money in and out of the market during a downturn means you could potentially miss out on any positive bounce in a strong market recovery. Market volatility is what generates the return on your investment, and you can therefore use volatility to make money. With experience we find that most events in life that are volatile or uncertain still follow a reasonably predictable pattern over time. In financial markets, making observations about the way markets have behaved previously in similar conditions should enable you to take the right actions and to reasonably predict the outcome.
Markets move in cycles and as surely as the sun will rise every morning, markets that have dropped will rise again. The question is, how far will they drop in any downturn and how long will it take before they start to rise?
When markets are uncertain in the short term, there are some important principles to consider before you invest. More than ever, the two key principles of liquidity and diversification apply. In simple terms, that means you should aim to invest in things that can easily be converted to cash again (don’t put your money into investments that are locked in or for which there are few buyers and sellers) and spread your money among many different investments rather than trying to pick winners. One of the most effective ways of achieving this is to use another basic investment principle, called dollar cost averaging. That simply means drip feeding small amounts of money on a regular basis into a diversified investment.
For long term investors, short term market volatility will seem of little consequence in years to come.
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