Investors are more likely to reach their long-term goals by avoiding emotionally driven and or fearful short-term decisions. These types of short term decisions may take investors off course thus nullifying the benefits of staying invested.
What this chart shows
Firstly, as this hypothetical example shows, investors may make suboptimal decisions when emotions take over. Emotional investors tend to buy out of excitement when the market is going up and sell out of fear when the market is falling. The benefits of staying invested takes advantage of the markets when they ultimately normalize. And they generally do. Therefore, those who have stayed may benefit more than those who don’t.
What it means for investors
Most importantly, to help reason prevail, first make sure you’re comfortable with your allocation to riskier assets. That it fits into your risk tolerance profile. You also need a logical framework for financial decisions. As well as a plan that anticipates periods of market turbulence. The benefits of staying invested and having systematic approach for reviewing portfolio results, with pre-established guidelines for selling, may also help.
A word about risk:
Investing in the bond market is subject to risks. This includes market, interest rate, issuer, credit, inflation, and liquidity risk. The value of most bonds and bond strategies is impacted by changes in interest rates. Bonds and bond strategies with longer durations tend to be more sensitive and volatile than those with shorter durations. Bond prices generally fall as interest rates rise. Consequently, the current low interest rate environment increases this risk. Current reductions in bond counter-party capacity may contribute to decreased market liquidity and increased price volatility. Bond investments may be worth more or less than the original cost when redeemed. Equities may decline in value due to both real and perceived general market, economic and industry conditions.
The S&P 500 Index is an unmanaged market index, generally considered representative of the U.S. stock market as a whole. The index focuses on the Large-Cap segment of the U.S. equities market. Barclays U.S. Aggregate Index represents securities that are SEC-registered, taxable and dollar denominated. The index covers the U.S. investment grade fixed rate bond market. Also with index components for government and corporate securities, mortgage pass-through securities and asset-backed securities. These major sectors are subdivided into more specific indexes. And are calculated and reported on a regular basis. It is not possible to invest directly in an unmanaged index.
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Past performance is not a reliable indicator of future results.
Disclaimer: This article is factual information only. It is not intended to imply any recommendation about any financial product(s) or to constitute tax advice. The information in the article is reliable at the time of distribution, but may not be complete or accurate in the future. For information about a loan that may be suitable for you, call us on 7111 0022.