Uncertainty undoubtedly brings with it a number of challenges for investors. Not the least of these, is the challenge to ignore the media hype, plastering bad news on our newspapers, radios and TV sets daily. For many, (particularly those without an adviser) the fear becomes too much and they switch their investments to cash or gold, in order to feel ‘safe’ again.

As uncertainty remains widespread, here are a few points to remember in your quest to build a capital base that allows you to do the things you want to do:

• Time in the market, not timing the market:

  

Short-term volatility is nothing new; in fact, the share market will go down on average 1 in every 3 years. Whilst the idea of selling high and buying low sounds attractive, the reality is that attempting to do so is wealth destroying.

Each year, the DALBAR study in the US calculates how much the average investor loses by changing their strategy, chasing last year’s winners, and trying to time the market. To the end of December 2010, over a 20 year period, an investor in a share fund received on average 3.80% return per annum, compared to the average market return of 9.10%! (See graph to right)

• Over time, the value of ‘Active Management’ is elusive:

As the above point shows, beating the market return over time is almost impossible for the individual. So, should we employ a professional fund manager to do this? Well when we look at the last 10 years of Australian Equity Funds (to 31 Dec 2011), we can see that not even the ‘professionals’ can do this consistently. As you can see, almost 150 funds have been closed (largely due to very poor performance), and the vast majority under perform the market as a whole.

 

 

 

 

 

 

 

 

Source: Vanguard analysis, using data sourced from Morningstar. Past performance is not an Indicator of future performance.

• The race to secure your financial future is a marathon, not a 100 metre dash:

As we approach the London Olympics, this analogy is an appropriate reminder that your investment timeframe if from now until the day you die, not until the end week, end of the month, or even the end of the year. As a result, your long-term investments should be viewed as such, long-term. For this reason, you should not be chopping and changing your strategy based on short-term changes.

As the graph below shows, if you invested $100,000 in December 1979 in a Term Deposit, to the end of 2011 you would have received $246,225 in Interest before tax, with $100,000 still in the account (assuming you spent the interest on living expenses). On the other hand, $100,000 invested in Industrial Shares would have paid you over $1,080,000 over the same timeframe, with the balance of your investment nearly $1.2 million.

So remember, uncertainty can make us fearful, but this does not mean we should act on this emotion. Focus on your long-term plan, keep your costs to a minimum, and match your investments with the timeframes of your goals. After all, I don’t think we will see Usain Bolt take out the Marathon!

By Steven Nickelson, Certified Financial Planner