Dollar Advice:

Getting your investment strategy started

“Next best thing” investments and strategies are constantly promoted in the media. We all know someone who talks about their “FOMO” in not buying cryptocurrency when it was one cent – and now it’s in the thousands of dollars.

It’s normal to feel tempted by something claiming to be “a better option”; but this may take you off course from why you’re investing in the first place.

Here are some tips for maintaining a sensible investment strategy regardless of all the noise, so you can stay focused on what actually matters.

#1 Hold cash, even in low-interest environments

The combination of a low-interest environment and strong investment performance over the last decade may have tempted us away from holding enough cash. “Why hold cash at less than one percent when the stock market is performing so well?”

The pandemic is a good case study for arguing for the importance of having a cash emergency fund. To have to liquidate investments for an emergency not only halts our progress but reverses it. Consider holding six to 12 months of enough cash to cover your costs, regardless of current interest rates and whether markets are rising or falling

#2 Don’t take more risk for the sake of it

If the stock market has always been rising, or a particular fund is performing, it may be tempting to expose ourselves to more risk, albeit unnecessarily.

The level of risk you decide to take should not be due to what is performing today. It should be a result of your tolerance to investment fluctuations and what level of risk is required for us to achieve what we are setting out to do.

If you’re unsure of the correct risk profile, seek professional help for a review, and rebalance your portfolio accordingly

#3 Diversify sensibly

We often see people with big chunks of their portfolios in a small number of things that they like. Remember, though, if you want to get the returns of the market, you need to hold as much of the market as possible. Diversify globally and with a mixture of different asset classes that aren’t directly correlated – for example, a mixture of equities and fixed-income investments. Do you have too few eggs in your basket? Do you need to diversify further?

#4 Don’t let “price anchoring” distract you

Price anchoring is when too much weight is put on the purchase price we paid for an investment. If the value of this drops significantly, we may anchor ourselves too much to the previous price, believing it will return to this level.

Don’t hold too emotional a connection to individual companies – it can distract from having a sensible long-term strategy.

If you feel you have too much concentration risk (that is, too much in one stock), perhaps look at diversifying your portfolio

#5 Remind yourself why you are investing

The investment in itself means nothing if there’s no reason behind why you’re saving. Remind yourself what you’re trying to achieve. What does your ideal life look like? What would you do if you had more time? If your investments don’t align with achieving that, maybe it’s time to revaluate.

At Pyrmont, we believe in following investment principles that academic evidence has proven successful over the long term (not trying to “outguess” the market), giving us the best chance of success.

If you feel you could benefit from implementing a more sensible approach, get in touch today.