When this question is asked, it usually means that the client is uncomfortable with the current volatility of their investment and need to find ways of reducing those feelings of discomfort.
They usually see this being done through moving their investment into cash and waiting until the market has calmed down to get back in.
The rationale behind this thought is understandable; if there is away to reduce pain, more than likely you are going to try to do that.
However, trouble exists in this thought process because people assume that they can get out, avoid all the pain of the volatility, then get back in and pick up where they left off once things settle down.
In reality, what usually happens is people will move their money into cash at a low point in the market and have their money reinvested after the market has already shot up, therefore, crystallising their losses and losing retirement savings in the process.
What’s basically happening in this situation is that people are selling their superannuation for 70c for the dollar, for example, and buying back in once the price is back at a dollar.
If you were a homeowner, you wouldn’t sell your home to someone when the value is temporarily low and then buy it back once the price has returned to normal would you?
It just doesn’t make sense to do that for a home, so why would it seem right to do that regarding an asset such as your superannuation and/or investments?
Volatility is in the price of everything and there is no exception when it comes to investments.
It helps to not think of those periods of low market value as a loss to your retirement savings, but rather as a period to increase your investment portfolio at discounted prices.
Knowing that you can buy a much larger number of shares for the same cost to you, helps to realise that sticking to your strategy will be the correct financial decision.
Written by
Ali Hogue.
