Three ways to handle the chaos
Not selling into panic is crucial for long-term investing success. So if you have been running your own share portfolio but find yourself doubting your ability to resist the temptation to sell when fear abounds, you might consider a different approach for the future.
• The first is putting your money into a low-cost index fund and leaving it in the proverbial bottom drawer to ride out the market’s ups and downs. Simply treat these funds as a savings account to which you add periodically and don’t check their prices too often.
• The second is a more active approach involving the “important asset allocation decisions” that Steve Johnson mentioned in his tweet (see main story). The idea here is to set a target asset allocation based on your objectives, risk tolerance and time horizon. The settings could vary widely, but for a younger person looking to build wealth, this might involve 40% Australian shares, 35% international shares, 15% term deposits and bonds, and 10% cash. When markets strike a volatile period and the allocations get too far out of whack, then you rebalance them. This rebalancing effectively pushes you in the direction of buying low and selling high as these assets move around in relation to each other. This approach is taken by many good financial planners who actively oversee their clients’ portfolios.
• The third is to find yourself some active fund managers with track records of profiting from such episodes, remembering that the key is to never, ever sell in the panic. “We want to buy shares at highly attractive prices,” Steve wrote in his September quarterly report. “The more a share price bounces around, the more chance that, at some point in time, it trades well below its fair value.”
Sharemarket volatility is manna from heaven for the seasoned value investor and 2020 proved another opportunity to profit from this time-honoured philosophy.
Many uncertainties remain, but when I cast my mind to the long term, I’m confident that a portfolio of well-chosen shares is highly likely to outperform cash in the bank over the next five to 10 years. Personally, I’m exiting this year close to fully invested in stocks with the intention of riding out any dips along the way.
I wish you all the best for a safe holiday season and a prosperous new year.