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Market volatility series part 3: How can you reduce the impact of market movements?

Whenever a share market decline is splashed all over the news, you probably feel like you should be taking some action. But when it comes to investing, a hasty decision is rarely a wise decision.

Instead, it’s worth thinking strategically beforehand about how you can structure your investments to potentially reduce the impact of market fluctuations. By choosing the right mix of assets to invest in, you’ll have a better chance of achieving your long-term financial goals. Here’s how to do it in five steps.

Step 1. Consider which type of investor you are

Almost every investment carries some level of risk – and generally speaking, the greater the risk, the higher the potential returns.

 

First of all, consider how comfortable you are with short-term market fluctuations, as they can impact the face value of your investments. Also consider that your comfort level may change as you move through different life stages. For instance, if retirement is still a long way off, you might choose to invest more in growth assets as you have a longer timeframe to ride out market fluctuations and generate returns over the long term. On the other hand, if you’re approaching retirement, you may be more conservative in your approach to protect the wealth you’ve already accumulated.

Step 2. Diversify your portfolio

Every market moves in cycles. No matter which investments you hold, it’s likely that they will experience a cyclical downturn. So to help offset market volatility, consider investing in different industries and asset classes. This strategy is called diversification.

 

Each investment can perform differently under the same market conditions – so when the value of one falls, another may go up. While there are no guarantees that diversification will fully protect you against loss, spreading your investments across a range of asset classes can help balance out the overall levels of risk and return in your portfolio.

If you’re approaching retirement, you may be more conservative in your approach to protect the wealth you’ve already accumulated.

Step 3. Understand the different asset classes

There are many different kinds of investments – all of which fall into different categories (called asset classes) with their own levels of risk. The more common asset classes include:

 

  • Cash – this can include money held in interest-earning savings accounts, which can provide a stable and easily accessible income – typically making it a low-risk asset class.
  • Fixed-interest investments – these include term deposits and government or corporate bonds (which can make them “safe” investments) that typically pay regular interest over a fixed term – usually between one and three years. 
  • Property – these can include direct property investments as well as property securities, which can allow you to invest in commercial, retail and industrial property holdings via the share market, making them higher-risk assets.
  • Shares – also known as equities – give you part-ownership of an Australian or international company, allowing you to earn dividends through capital growth. Shares are generally considered one of the highest-risk assets classes, but can also provide higher returns over the long term.

Step 4. Consider other ways of investing

If you’re nervous about investing in shares directly, there are other alternatives available. One option is to invest in a managed fund, where you pool your money with other investors. Your combined capital can then allow you to invest in assets that might otherwise be out of reach to a single investor. It can also help spread your risk exposure across a wider selection of investments.

 

There are many different types of managed funds, and they all usually focus on a specific investment objective. Each comes with its own risk profile and approach, so make sure you shop around to find one that best aligns with your investment strategy.

Step 5. Review your investments regularly

For many of us, our investments tend to be something we set and forget. But it’s worth revisiting your investment strategy from time to time – and not just when markets move significantly. That way, you’ll be better prepared when markets do become volatile.

 

A financial adviser can help ensure that you have the right mix of assets for your investment timeframe and risk profile. They can also help monitor your investments through periods of market volatility, so you can be more confident that you’re on track to meet your financial goals.

 

Want to learn how you could use market movements to your advantage? Learn more here.

Disclaimer

This document has been prepared by Colonial First State Investments Limited ABN 98 002 348 352, AFSL 232468 (CFSIL). The information, opinions, and commentary contained in this document have been sourced from Global Markets Research, a division of Commonwealth Bank of Australia ABN 48 123 123 124 AFSL 234945 (CBA). Global Markets Research has given CFSIL its permission to reproduce its information, opinions, and commentary contained in this document and for CFSIL to authorise third parties to reproduce this document. This document has been prepared for general information purposes only and is intended to provide a summary of the subject matter covered. It does not purport to be comprehensive or to give advice. The views expressed are the views of CFSIL at the time of writing and may change over time. This document does not constitute an offer, invitation, investment recommendation or inducement to acquire, hold, vary, or dispose of any financial products. CFSIL is a wholly owned subsidiary of CBA. CFSIL is the issuer of super, pension and investment products. CBA and its subsidiaries do not guarantee the performance of CFSIL products or the repayment of capital for investments. This document may include general advice but does not take into account your individual objectives, financial situation or needs. The Target Market Determinations (TMD) for our financial products can be found at www.cfs.com.au/tmd and include a description of who a financial product is appropriate for. You should read the relevant Product Disclosure Statement (PDS) and Financial Services Guide (FSG) carefully and assess whether the information is appropriate for you and consider talking to a financial adviser before making an investment decision. The PDS and FSG can be obtained from www.cfs.com.au or by calling us on 13 13 36. Past performance is no indication of future performance. Stocks mentioned are for illustrative purposes only and are not recommendations to you to buy sell or hold these stocks. This document cannot be used or copied in whole or part without CFSIL’s express written consent.