Where to invest amidst ongoing volatility
Beware of cash savings – the real value of your savings can actually decrease over time
The future is looking bleak for cash savers. The problem is that cash savings earn a very low rate of interest. These low interest rates often don’t keep up with inflation (the rising cost of living), which means your savings can decrease in value ‘in real terms’.
Investing in the stock market can protect your savings, but what about the volatility?
For this reason, many people invest in the stock market to protect their savings even if, at first glance, it might seem less ‘safe’ than holding your money in cash. Investing in equities (or shares) can seem daunting, because the market is never stable and prices can quickly go from very high to very low. At the moment the stock market is particularly unstable. The question is whether to invest now, when there is so much volatility, or to wait for the financial storm to pass.
When investing, it is better to rely on intellect rather than emotion
When it comes to investing, people often act on instinct rather than on methodical thought. Investors become unnerved when there are sharp rises and falls in stock markets, such as we’ve seen so far in 2017. When there is a ‘bull market’, when prices are rising or expected to rise, they often rush to invest. When it turns and we enter a ‘bear market’, investors often react with fear and pull out – usually at the worst possible time, making personal financial losses in the process. Contrary to how investors often behave, it can be better to invest when prices are low and to buy when everyone else is selling – which can take a lot of courage.
Investing small amounts in phases can help reduce exposure to falling markets
There is an alternative way to invest if you are anxious about investing large sums when the markets spike at a high or low. Rand cost averaging is a technique where you drip-feed a regular sum into you investment portfolio rather than investing a lump sum. By investing at regular intervals, you spread your share purchases across a range of market levels. This means it is less likely that all your shares are purchased when prices are at the top or bottom of the market.
Stay focused on your investment goals and invest for the long term
The best practice is to invest with a long-term view of at least five to ten years. If you build a portfolio of funds that suits your risk tolerance, the peaks and troughs in the stock market will often be smoothed out over the long term, providing you with the desired return when your investment matures. Choosing the right funds also takes the guesswork out of investing in the stock market as it is the fund manager’s job to anticipate risks and periods of volatility and adjust the holdings accordingly.