Let’s be clear on a few basics. Volatility is why stocks offer higher rates of return than bank deposits, writes Liz Koh.
Liz Koh is a financial expert specializing in retirement planning. The advice given here is general and does not constitute specific advice to anyone.
OPINION: The world is changing once again. The past few years have been a dream ride for equity and real estate investors with the occasional hiccup and it has been a nightmare for those who haven’t dared to walk away from bank deposits, despite historically low interest rates. .
Now that unemployment rates have fallen and corporate profitability and economic growth have stabilized, the threat to global economies is not recession but inflation. It’s time to take your foot off the accelerator and brake. This means tighter monetary policy and higher interest rates. At the same time, the global political situation has changed and presents risks that could interfere with global economic growth. We are entering a new phase with increased volatility and uncertainty in the markets.
What does this mean for investors? The good news is that higher interest rates will benefit those who prefer to keep a good amount of money in the bank. In the low interest rate environment, investors have gone in search of higher yields on equities and real estate, however, the increased volatility in these markets will likely lead to a decline in bank deposits to some extent.
Term deposit investors should keep in mind that their challenge is to stay ahead of inflation and taxation. Higher inflation is likely to erode any benefit from higher interest rates. Bank deposits are best considered a safe place to keep funds to cover short-term expenses. They will always struggle to provide enough return on investment to outpace inflation.
Volatility is something long-term investors have no choice but to live with. Seasoned investors have learned to use volatility to their advantage, while for nervous investors there will be plenty of opportunities over the next two or three years to make poor investment choices that could result in unnecessary losses.
Let’s be clear on a few basics. Volatility is the reason stocks offer higher rates of return than bank deposits. There’s nothing to be scared of; you just have to manage it.
There are two key principles for managing volatility. The first principle is that your stock investment should be diversified to reduce risk. The second principle is that you must match your investment strategy to your investment schedule. When investors lose money investing in stocks, it is because one of these investment principles has been violated.
The problem is that many investors have not thought about the duration of their investment. For most retirees, the plan should be to spend your funds gradually during retirement. Since the average 65 year old lives to be 90, this means you will continue to invest for many years after your retirement day.
For long-term investors, short-term volatility is nothing to worry about. Good fund managers will find opportunities to buy stocks cheaply during a market downturn. The best returns are obtained by buying low and selling high. Inexperienced or nervous investors do the opposite; they buy near the top when everything looks good, then panic and sell when the market drops.
In times of volatility, always review your investment goals and investment schedule. If they haven’t changed, you shouldn’t have to change your investment strategy unless it was flawed to begin with. Make sure you have access to funds in stable investments such as bank deposits to cover your short-term expenses, so you can withstand fluctuations in volatile investments.
Often in times of volatility, novice investors ask whether it makes sense to withdraw money from investments before they lose value and reinvest when the market recovers. The answer to this question is a resounding no! It is only possible to know when a market has bottomed or peaked with hindsight, and then it is too late to take advantage of the turn. Research has proven time and time again that riding through market shifts is better than trying to time the market.
So stick to your investment strategy and relax with the confidence that comes from understanding that volatility is what drives investment performance.