5 tips for investing in a volatile environment

You should always hold enough cash to cover yourself and your investment through a downturn. (Source: Getty)

A rising consumer price index (CPI), interest rate pressures, change in government and a pressure on food supplies. No wonder investors are nervous.

And across the globe, there’s a war in the Ukraine and the world oil supplies are in strong demand.

It’s fair to say we’re in a volatile market.

But Jonathan Philpot, partner from personal wealth management company, HLB Mann Judd, reminds us that across the decades there have always been volatile markets that have dropped and then recovered.

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And to safeguard your investment strategy he offers his top five tips to help.

1. Make sure your investment portfolio reflects your goals

It’s important to remember where you are in your investment journey.

For example, this could be saving for a home deposit in three years, or if your goal is to hold investments, then look at a five to 10 year period for a more balanced portfolio return.

“If you’re looking for a longer term investment strategy, say 10 years plus, you can take risk when you’re young, but not sufficient risk later in life or if you’re older,” Philpot said.

2. Understand that volatility is basically the price you pay for higher returns

The US market is the biggest in the world. Since 1946 to 2022, the US market has seen 84 decline between five and 10 per cent.

This works out as more than once per year that the market will drop significantly.

But the average time to recover this loss is only one month.

Philpot explains further.

What’s interesting through volatile times, is typically you’re getting the very best return shortly after the large falls in the share market.

“This shows that by selling after you have experienced a fall in the portfolio, it will most likely cost you. It is impossible to try and pick the tops and bottoms of share markets, but letting ‘fear’ take over the decision making usually will cause significant damage to a portfolio,” he said.

“Interestingly, clients that went through the global financial crisis (GFC) dealt with COVID volatility well because they have been there before, whereas less experienced investors struggled with the extreme movements.”

3. Have a written investment strategy

Sit down and write down your investment strategy.

This should reflect your investment goals and include asset allocation ranges with minimum and maximum levels for each asset class.

Philpot said that people who apply this strategy will actually profit from market volatility, make decisions without emotion and when an asset becomes cheap they buy more.

The key is sticking to a strategy and avoid being driven by fear (more about this in point five).

4. Always make sure you have some level of secure, fixed interest investments in the portfolio

This means having enough in some cash fixed interest that will see you through a market downturn. This is most important with investing, so you are not selling when things are down.

“Having that cash reserve there in place really helps and saves sleepless nights. After all we’re human beings, and when things go down, we obviously will worry.”

At any time, retirees should have at least three years worth pensions for living expenses in a secure part of the portfolio.

“That way they won’t have to sell shares at the wrong point in the market due to shortage of cash. The same for younger aggressive investors; have a cash reserve, and it does help with the ‘sleep at night’ factor.”

Also, don’t forget the benefits of diversification; property, shares and some fixed interest.

As a rule, Philpot recommends having a minimum and maximum level for the different asset classes in a portfolio.

For example, Australian shares have a minimum 40 per cent, maximum 60 per cent.

International shares minimum 30 per cent, maximum 50 per cent.

Fixed interest minimum 30 per cent, maximum 50 per cent and with cash minimum five per cent maximum 20 per cent.

For those who wish to include crypto in their investment portfolio, limit this to only five per cent of your overall investment dollars.

“Everyone is talking about crypto. I’d be very cautious about diving too deeply into crypto because we don’t have enough investment history that we have with others to understand how it tracks over time,” Philpot said.

5. Don’t let fear drive your decision to sell

Think twice before making any sort of emotive decision making in volatile times.

This certainly causes a lot of damage to people’s bottom line, regardless of whether it’s selling shares or switching superfunds.

“There are many reasons why you might sell, but simply because markets have dropped 10 or 20 per cent and you hit the panic button will never turn out to be the right strategy for your portfolio.”

Greed and fear drive investment making decisions, it is actually fear that does the most damage.

“Hold onto most assets long enough and you will still make money, but selling every time a big fall only locks in losses,” Philpot said.

“This is the reason why most investors never achieve a market return. Peak selling is always at the very bottom of the markets. Emotive decision making in volatile times will cause large financial pain. If you hold on long enough through the investment cycle, then the damage might not be too bad.”

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