What are peo­ple wor­ried about?

Finweek English Edition - - MONEY -

It is the risk of los­ing cap­i­tal. It is mar­ket risk. This is an im­mi­nent risk and there­fore pos­si­bly the most fright­en­ing risk. It con­jures up im­ages of peo­ple los­ing all their money i n mar­ket crashes, de­spon­dent traders and red screens.

Mar­ket risk can be de­feated by pa­tience. It dis­si­pates over time. His­tory shows that there are very few five-year pe­ri­ods within which in­vestors will have lost cap­i­tal. The longer the hold­ing pe­riod, the lower the chance of los­ing cap­i­tal and un­der­per­form­ing cash. The catch is of course in the word ‘ Hold’. His­tory also shows us that in­vestors are skit­tish.

Mar­kets fall for rea­sons. There are hordes of clever in­vestors who re­act, seem­ingly log­i­cally, on the prospects of poor eco­nomic times ahead. If you are a long-term in­vestor though, your time hori­zon is not the next year or even three years. Your time hori­zon is some­times twenty or even forty years. In any event, mar­kets start re­cov­er­ing long be­fore the econ­omy re­cov­ers. No one rings a bell to de­clare the end of a bear mar­ket.

Have you ever heard in­vestors say: “I will rather miss the first 10% of the up­turn and be sure that the trend has turned?” Who will tell you that the trend has turned even af­ter 10%? Rather stay in­vested. The ben­e­fit of in­vest­ing in the share mar­ket over the long-term is com­pound­ing, not tim­ing. Al­bert Einstein called it “one of the most pow­er­ful forces in the universe”. The power is only avail­able to those who stick it out.

Mar­ket risk can also be off­set by di­ver­si­fi­ca­tion i nto safe as­set classes. If you are ex­posed to a few as­set classes, the chances are that some will per­form when oth­ers do not. That is the key to a diver­si­fied port­fo­lio – not all your as­sets can do well at the same time. Mea­sure your over­all wealth, not the un­der­ly­ing con­stituents.

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