10th September 2008
Understanding Characteristic Market Trends
There is uncertainty in the market place as investors and market experts wait to see 'what the market will do'. Uncertainty in the investment markets is caused by many factors – wars and depressions, stock market crashes, 'Tech wreks', September 11, and the US sub prime crisis. Events like medical breakthroughs and government policies also contribute to market volatility. While no one can predict what the market will do, analysis shows that while the market experiences both negative and positive movement and moves through a cycle of volatility to stability, the market continues to trend upwards (refer 2008 Andex Chart for Australian Investors).
We can learn from the characteristic trends of the market to assist investors with how to invest.
Markets are cyclical
It is the nature of investment markets to go up and down. Analysis has shown that when the market rises sharply it will eventually come crashing down. It is very difficult for the market to sustain such a spike and usually comes down in the same way. This often happens with 'Investment Bubbles' which occur when investment decisions are made on speculation, that is, when investors believe that the investment, or investment environment, has changed in a unique way and that the prices will not come down. An example of this is the 'Tech wreck' in the late 1990s and the Tulip Bulb Mania that occurred in the mid-seventeenth century. It is important to remember that if investors keep to their long term goals and resist making reactionary decisions at the time of volatility then investors may have a greater chance of maintaining, recovering or even growing their investment.
There are many ways to assist in riding out the volatility of investment markets. One very common method is diversification, where you spread your investment across different investment types such as asset classes, within an asset class, and even across countries. Diversifying in this way means that if one investment type experiences a negative return, your overall exposure to loss is contained to just that single investment. It is even possible that if one investment experiences a negative return and another experiences a positive return you may negate the loss and therefore sustain equilibrium.
Time in the market
Many inexperienced investors get caught trying to pick the 'big' days to invest or withdraw from market. Investment markets are unpredictable and to invest in this way is extremely risky and rarely, if at all, fruitful. Investing requires patience, and resisting the urge to withdraw when markets are on a downturn is difficult, but doing so may be the only chance of recovering, as well as potentially growing, your investment.
Just as you need to be cautious about market downturns, remember it can also return, and therefore you may recover any loss you have experienced. Withdrawing your funds when the market is in a negative position will only realise any loss that has already occurred. An experienced investor will however consider whether an investment remains a good investment for the future.
Begin saving early and regularly
You don't need a lot of money to begin investing. The earlier you begin investing and saving, the longer your money will be invested, and you can take advantage of riding out market volatility and gaining from compounding your interest to assist with growing your investment faster. Regular savings also helps to take the guesswork out of trying to find the right time to invest.
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Head of Funds Management
t +61 3 8610 2811
Chris Andrews is the Head of Funds Management for the La Trobe Group and has responsibility for the La Trobe Australian Mortgage Fund.
Read full profile here.
La Trobe is one of Australia's leading independent specialist mortgage Financiers. Its business includes residential mortgages, commercial mortgages, and investment services operating one of Australia's largest Mortgage Funds under AFSL 222213. It employs over 115 staff and has raised over AUD$10Billion to assist over 100,000 customers since inception in 1952.
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