Be proactive, not reactive
The market is constantly changing, and volatility is just part of the investment landscape. But don’t let it catch you off guard. Instead of reacting impulsively to market fluctuations, take a proactive approach to investing.
One way to be proactive is to choose an investment strategy that fits your risk tolerance. This means avoiding impulsive decisions and instead selecting an approach that aligns with your long-term goals.
With over 10 years left until retirement, your portfolio can probably still handle short-term volatility. So unless your personal tolerance of risk has reduced, it’s likely to still be a good idea to choose higher-risk investment options for (potentially) higher returns.
And of course, diversification is also a key component of a proactive approach. Now is a good time to think about all the tools and strategies you have available, and plug any gaps you identify.
At this stage of life, it’s also appropriate to get more serious about your retirement planning. Make sure you get your thinking and ideas about the future on paper and document a strategy to help you achieve those ideas and goals. This will provide a reference point from which to make proactive decisions about your investments, regardless of what the market is doing at any point in time.
Diversify your retirement income sources
What income sources will you have in retirement? Diversifying your future retirement income source is another way to manage volatility and achieve peace of mind. Potential income-generation tools include (but are not limited to):
- A paid-off house
- Property investments
- Shares and mutual funds
- Building/buying a business
It’s important to note that different assets come with different risks and benefits. Take a closer look at what you have in place, and consider your big financial picture. Can you afford to expand your strategy and incorporate other income sources? Which tools can help you spread out the risk and make the most of volatility?
Don’t crystallise reduction in investment value
Many people think that a market downturn equates to a loss of money. In fact, the actual loss only occurs when you sell or switch your investments during the downturn.
During the Covid-induced downturn of March 2020, many people tried to ‘protect’ their funds against volatility by moving them to lower-risk options. However, this led them to sell their investments when the market was low and miss out on the recovery. Little did they know that the market would bounce back only a few weeks later.
This highlights the value of avoiding impulsive decisions and sticking to your investment plan. Essentially, if your risk profile and circumstances remain unchanged, you can ignore short-term market fluctuations and focus on the long-haul journey.
Think about increasing your contributions
If the market is going through a rough patch, and depending on your personal situation and objectives, you could actually benefit from it by increasing your contributions. It’s a bit like getting a discount on your favourite item at the supermarket, except in this case, you get to buy more shares or units at the lower price and be in the front seat when the market bounces back.
Of course, the past never predicts the future, but the lessons in history show that markets recovered from periods of turmoil. And if retirement is still over 10 years away, the value of your investments has plenty of time to go up and recover.