Here are three things to think about if you already think things have been going pretty well:
- Being overconfident.
As many investments over the last five years have worked out ok, many clients begin to feel confident about their ability to predict where returns will come from – or pick future winners. Strong performance of your investments during a rising market isn’t always an indicator of skills. It’s how we behave and how your investments perform during times of market distress that are the signs of a good investor, and a good portfolio.
- Underestimating the benefits of diversification.
Diversification may sound old fashioned, and returns from multi-asset, risk-managed funds may appear ordinary compared to the hottest sector of the moment. In reality, true diversification across a number of sources of risk and return remains a smart strategy for spreading investment risk in good times and bad.
- Being swayed by recent events.
We are wired psychologically to give undue weight to the most recent events, but investment mistakes occur when you make decisions based just on recent market events. With the GFC still fresh in the minds of many investors, global shares were shunned as being “too risky” a few years ago. Now that global shares have had three very strong years of returns, many investors are interested in them, yet the best returns have possibly been made. Instead of chasing yesterday’s winners, and reacting to the most recent and dramatic news, it’s best to remain patient and stick with the strategy that was determined to be most likely to achieve your long-term goals.
We often go to considerable efforts to maintain the belief that we’re in control in situations where we really aren’t. It’s the same for investments: no one truly knows what lies ahead in the market. The best we can do is plan for a range of different possible market outcomes, not get overconfident, be swayed by headlines or forget the fundamentals of good investing strategy.
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