Patient Investors will Be Rewarded

Of course hindsight is always a wonderful thing when it comes to investing. The critical point for investors is that volatility is not a cue to sell. Investment portfolios are a long-term investment - one you should be prepared to hold onto for a minimum of around seven years.

Over time, returns on quality investments have historically outpaced inflation, and without this growth you face the real prospect of an investment nest egg with dwindling purchasing power. But with the good comes the bad. Assets that deliver the highest long-term growth often have the greatest short-term fluctuations in value. While the outlook for 2008 is uncertain, if you have a long-range investment timeframe, selling out now could be costly.

Recent research by Shane Oliver of AMP Capital Investors illustrates this very point. According to the study, significant share market falls have been rare in recent years but are not uncommon over long-term periods. Indeed if we exclude the latest share market rout, there have been 12 previous occasions since September 1960 when the Australian share market has fallen in value by more than 20%. Yet in each case the market has gone on to stage a comeback – often in spectacular style.

Between September and October 1997, for instance, the market fell 21% yet rose by 18% over the following 12 months. More recently, between March 2002 and March 2003, the market dipped 22%, but delivered gains of 27% over the next 12 months.

The bottom line is that if you are holding onto shares as part of a long-term investment plan, it doesn’t make sense to sell out now. Sitting tight through periods of market volatility can be a real test of an investor’s resolve and it is understandable to want to bail out during periods of uncertainty. But in the past shareholders who did nothing more than sit tight through downturns generally recouped their peak portfolio values.

TIPS

·  Wealth creation is about having sensible goals and sticking with them. It can sometimes make sense to adapt your long-term strategy in response to short term market dips - but not to abandon it altogether.

· Trying to pick the bottom (or top) of any market is a mugs game. Holding onto quality investments for the long term is more successful than trying to time the market.

· Joining the stampede to sell your shares during a downturn will only cement losses that may otherwise only be ‘on paper’.

· The months ahead may offer good buying opportunities for investors. Drip-feeding your money in a process known as ‘dollar cost averaging’ can be useful during periods of volatility.

· Review your gearing. The last thing investors need is a forced sale as a result of a margin call.