One of the most frequently asked questions we get asked in our practice is when do you think the next market crash is going to be?
Our answer is always the same, we don’t know, and we don’t speculate on economic downturns, we do know that smart investing is about using a diversified investment approach with the use of a strategy called dollar cost averaging over a long term time frame (10 +years)*.
You may think this is an uninformed approach to a market crash, however our philosophy is about and always will be time in the market not timing the market.
We know that bad stuff happens everyday and not just in the stock market, for instance over the last 20 years we have had, 9/11 in New York in 2001, Bali Bombing in 2002, Second Iraq War in 2003, Boxing Day Tsunami in 2004 and in 2011 the Tsunami in Japan, yet many individuals still flock to these popular tourist destinations.
During the same time in the global economy we have had major organisations collapse, HIH Insurance and Enron in 2001, Lehman Brothers in 2008 and one of the most damaging crises to the US economy was the Sub Prime Mortgage crisis which ran from 2007 to 2010.
What is Diversification & Dollar Cost Averaging?
Diversification means to invest into a diversified portfolio of high-quality investments that is spread across hundreds of companies.
By diversifying across many companies, we potentially reduce the exposure to individual company risk. For example, if one company fails and 299 do well, then the investor will have gained overall and is in a less vulnerable position than if they invested only in the one company that failed.
This approach helps prevent investors from putting all of their eggs in one basket and hoping that everything will go okay. In other words, ‘diversification is bargaining away the right to make a killing in return for never being killed.
The other strategy that is essential to accumulating wealth over the longer term is Dollar cost averaging. Dollar cost averaging is just investing regularly without thinking about it, usually via direct debit or regular contributions.
For instance, if you were going to invest $1000 a month into a managed fund or direct share that has a unit price of $1. 00 in month one, you would receive 1,000 units. However, the next month the price of your investment has dropped by 25% to 75c and although this may impact on your last month’s portfolio value, your plan is to invest another $1000 again and guess what you would get MORE UNITS for your money. Then the next month it drops again to 50c. Even though you may think this is an exaggerated example, and it is, this is really what happened during the Global Financial Crisis in 2008. The upside though is now you are getting TWICE as many units for your money. Then in month four the share price rises back to $1.00.
So what’s happened here? You have invested $4,000. If we looked up the Sunday paper to see the performance of your investment, what would it say the performance was? We started at $1 and four months later it’s at $1.00. Therefore, the four-month performance of your investment was 0%. But hang on. you have made over 30%.
Also during this time what the newspapers were actually saying is ‘PANIC, Depression, Trillions lost’ – making MOST people totally petrified of investing.
But as Warren Buffet says – ‘When everyone is scared you should be excited, and when everyone is excited you should be scared’. So we recommend to keep buying and yes, the market does go back up and as you see it eventually gets back to where you started.
it’s VERY IMPORTANT to understand that the performance of the investment is not the same as the performance of your strategy.
We specialise in working with medical professionals all over Australia, so please feel free to get in touch if you are interested in discussing investing or your personal situation.
Our number is 1300 077 123 or firstname.lastname@example.org