The festive season can be a great opportunity to step back from the fray, relax for a while and look at the big picture. For investors, it’s a chance to review the year that was and re-examine their goals for the one ahead.
Every portfolio and each year is different, but here are 5 key New Year’s resolutions for investors.
1. Diversify
In an increasingly complex and uncertain world, it’s essential that investors hedge their bets.
Diversification helps you ride out the ups and downs of markets and economic cycles by spreading your risk, leaving you less exposed to any one event or trend. And higher-risk assets, which promise greater reward but are also likely to be more volatile, should be offset by assets that offer lower risk and return but more stability.
For example, exposure to property may benefit a portfolio that currently contains only equities, bonds and cash. This exposure could be through either direct property or a vehicle such as a property trust or mortgage fund. This exposure could deliver an additional degree of resilience that may result in healthier overall returns in the long run.
2. Rebalance
Over time, the value of each asset within your portfolio can earn a different return, giving it a different weighting within your investment portfolio. Rebalancing is the ongoing process of buying and selling holdings to adjust for these changes in the world around you and in your personal circumstances.
It can seem counter-intuitive, because rebalancing may require the selling of currently outperforming assets to buy currently underperforming assets. But markets keep moving, and it’s important to keep your eye on the big picture—your goals, your tolerance for risk, your investment time horizon and your liquidity needs.
Vanguard recommends all investors set a “rebalancing trigger” and stick to it so as to keep themselves disciplined. For example, you could choose to check your investments every six months to see if they need rebalancing.
3. Don’t rely too much on the opinions of experts
Some events are dangerous because they are so improbable or unpredictable that we develop a psychological bias or “collective blindness” to them. The implications for investors and others were explored by the writer Nassim Nicholas Taleb in his book The Black Swan: The Impact Of The Highly Improbable.
Examples might include the collapse of the oil price in 2015, or the recent unrest in Hong Kong. Studying such events, says Taleb, reminds us never to place too much faith in the predictions of experts. Reliable, accurate market forecasts are just a fantasy.
As many a disclaimer notes, past performance is no guarantee of future results. Sometimes your intuition is just as useful as any complex financial model, which simply cannot cater for black swan events.
You can aim to keep your investment portfolio crisis-proof by actively diversifying, rebalancing, and staying informed.
4. Block out the noise, and don’t try to time the market
From the minute you wake up and check your phone, the deluge of information begins. Commentators and the media are constantly urging us to take note of the latest geopolitical headlines, market movements and breaking news.
It’s important to keep abreast of developments, but experienced investors learn to ignore the chatter and don’t get distracted by short-term fluctuations or the rollercoaster emotions of the “herd”. Sometimes it’s best to allocate your limited time and attention to worrying about the things you can predict and affect, and block out the market noise.
Knowing that you have sound portfolio management practices in place will give you the self-confidence to avoid the temptation of reacting emotionally to events and trying to time or follow the markets.
5. Stop and smell the roses
Take time out of your busy schedule to appreciate life. If you’re doing all you can reasonably do with regard to saving and investing, then you can afford to relax a little.
The principle of diversification applies to enjoying yourself too—there’s no way of knowing what tomorrow will bring, so don’t spend too much time worrying about your financial future, or pin all your hopes on a retirement that may be years away. Make time today for the things and the people you love.
The information on this website contains general information and does not take into account your personal objectives, financial situation or needs. Trilogy is only licensed to provide general financial product advice on its own products and does not consider your objectives, financial situation or needs when providing any information or advice.
