At the beginning of last week (26th of November) the cover story in the Economist was all about the imminent collapse of European financial markets. The headline “Beware of falling masonry – The crisis in the euro area is turning into a panic and dragging the zone into recession. The risk that the currency disintegrates within weeks is alarmingly high” said it all. It would have been quite understandable for any investor to have panicked after reading this. After all, The Economist is a highly respected economic publication.
Only five days later an article in the Financial Review commented that the week had been “the best week on the share market in 3 years”. The market had risen by 5.2%.
Nobody knows what the share markets are going to do at any particular time. There is even research to show that share markets are not directly related to economic criteria, as logical as that would be.
The current extreme volatility plays havoc with investor emotions. For those who are still accumulating assets the question is whether to simply phase in regardless of price, stay out completely or try to time purchases to maximise returns. For those closer to retirement but with an expected investment life of at least 20 years, it’s even more of an emotional roller-coaster.
Why is it such an emotional roller-coaster and how can it be avoided? This is really the big issue.
Investor emotions arise from ‘fear’ and ‘greed’. Fear of not having enough, of running out, of losing status. Greed is the symptom, not the cause. (More of that in another blog). How to avoid fear?
Identify the risks, come up with a plan to mitigate those risks as much as possible and have a fall-back position in case all else fails. Then evaluate the possible scenarios and test the approach adopted against each to ensure that no matter what happens there’ll be enough. Then write it all down into an Investment Policy Statement. It’s actually quite simple.
To find out more about drafting an Investment Policy Statement please contact Melissa Oliver at SentinelWealth on (02) 8908 5300 or info@sentinelwealth.com.au.
