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Considerations for markets on the rise

When markets become volatile, some investors switch their investments from growth to defensive assets. But how do they know when it’s time to switch back?

Top five considerations for markets on the rise

It can be difficult to predict what will happen next in financial markets, which is why switching one’s investments when markets are volatile can add an additional layer of investment risk: the potential to lock in losses or miss out on gains when markets stabilise over time. While market volatility can lead investors to adopt a less risky approach to investing by switching from growth assets to defensive assets, the recent uplift in financial markets has posed a new question: how do we know when to switch back? While investment decisions depend largely on individual circumstances, there are five things that all investors can consider to help with the investment decision-making process.

1. Consider how much risk you can take

When it comes to deciding whether to make changes to your investments, it may help to determine how much investment risk you are willing and able to take. To help determine your risk profile, consider your financial circumstances and obligations, review the investments in your portfolio, and establish what time horizon you are investing over. For example, an investor who is approaching retirement may have a shorter time horizon – meaning, they may have less time to ride out market volatility and generate returns. For this reason, they may not be able to tolerate as much risk, could naturally have higher exposure to defensive assets, and may choose to make only minor changes to their investments (depending on their personal circumstances and professional advice).

2. Keep an eye on market developments

Financial markets fluctuate over time, influenced by a range of interconnected factors – from economic developments to civil unrest, trade negotiations, pandemics and even cyclonic weather. However, information is more accessible than ever before, making it easier for us to further our understanding of the world around us – including developments in ever-changing financial markets. But it can also be easy to feel overwhelmed – not only by the amount of information available, but by the often-sensationalised news headlines in the media. In the same way that people source a second opinion, it may help to source your news from different places – helping you to paint a fuller picture of market developments as you consider your next steps.

3. Look at market benchmarks

To track the performance of different investments over time, investors refer to benchmarks (also known as indices or indexes). A benchmark serves as a standard against which the performance of investments are measured. There are hundreds of benchmarks to choose from – for example, benchmarks for each asset class (such as shares or fixed interest), or benchmarks that represent broader market characteristics (such as large-cap or growth investments).

 

 

However, don’t feel overwhelmed by the number of benchmarks. Instead, consider some of the more commonly quoted indexes that track overall movements in markets – like the ASX 200, which is the official benchmark for the top 200 stocks listed on the Australian share market, or the S&P 500, which tracks the performance of the top 500 stocks listed across the United States. Reviewing these indexes could help inform your understanding of market trends and how investment performance is tracked over time.

4. Review other key market indicators

World economies and financial markets are often closely connected. We saw this recently with Coronavirus, which resulted in an economic shutdown that had flow-on effects to financial markets due to the rapid decline in economic activity. For this reason, some investors look at what’s happening in world economies by observing key economic indicators. Two of the most watched indicators by financial markets are the Gross Domestic Product, which reflects the market value of all goods and services produced in a country over a period of time, and the unemployment rate, which records productivity in an economy and notes other trends like consumer spending. But when looking to the future, forward-looking economic indicators may help. These could include a higher oil price, which could show if economic activity is restarting, as well as changes to the Reserve Bank of Australia’s official cash rate, which could hint at future economic growth prospects.

5. Chat to a skilled investment professional

While the above points can help investors inform their understanding of financial markets, it may help (if you are able) to speak to an expert – for example, a financial adviser with years of experience in monitoring economic and financial market developments. They could not only help you review your existing financial plan, but could assist you in setting new financial goals, and offer advice about your investment portfolio – including whether switching from defensive assets back into growth assets may be right for you based on your individual circumstances.

How you can learn more

Colonial First State has been helping Australians with their superannuation, investment and retirement needs for more than 30 years – no matter the circumstances. Visit www.colonialfirststate.com.au for news, insights and other helpful resources, or contact our team for more information about how we can help you achieve your individual investment goals.

Disclaimer:

Colonial First State Investments Limited ABN 98 002 348 352, AFSL 232468 (CFSIL) is the issuer of super, pension and investment products. This document may include general advice but does not take into account your individual objectives, financial situation or needs. You should read the relevant Product Disclosure Statement (PDS) and Financial Services Guide (FSG) carefully, 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.
 

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Disclaimer
Colonial First State Investments Limited ABN 98 002 348 352, AFSL 232468 (CFSIL) is the issuer of the FirstChoice range of super and pension products from the Colonial First State FirstChoice Superannuation Trust ABN 26 458 298 557. CFSIL also issues interests in products made available under FirstChoice Investments and FirstChoice Wholesale 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, 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.