Personal Finance in a Downturn

Since 2000, investment markets have weathered a variety of conditions – from volatility to stability, then recovery and volatility again. These changes have left many people wondering what the best way is to approach their investments.

The 1990s provided a period of stability and sustainable growth for investors, yet by the end of the decade, a series of events that were largely unpredictable had taken their toll on investment markets. The ‘tech-crash’, September 11, corporate corruption, the global economic slowdown, and the war in Iraq all contributed to volatile conditions in the markets.

From 2003 the global economy started its recovery and conditions stabilised, giving markets the opportunity to respond favourably. At the beginning of 2007 the ASX was 83.1% higher than it was at its highest point in the 1990s*. Now concerns over sub-prime lending in the US, the subsequent credit crunch and a slowing US economy have sent shock waves through stock markets across the world.

1. Markets move in cycles. They go down, but history has shown us that they always recover. (Similarly, markets that rise excessively will eventually come crashing down, so beware of buying into investment bubbles.) The best approach is to accept market volatility, stick to your strategy and don’t panic. By withdrawing from the market you could be robbing yourself of valuable gains.

2. Diversification reduces risk. Because it’s impossible to predict market movements, one way to manage market risk is to maintain a diversified portfolio. Spreading your investments across a range of carefully diversified assets will minimise the risk and smooth your returns. Your HL B Mann Judd financial planner can help you diversify your portfolio.

3. ‘Time-in’ not ‘timing’. Be patient, especially if you are investing for the long term. When things look bleak it’s important to keep your goals in focus. Getting out of the market could mean you miss the rebound and the returns that go with them.

4. Start early, save regularly. The sooner you start investing and the more often you do it, the better. Setting up a regular savings plan takes the guess work out of trying to find the right time to make an investment. Starting now will give your money time to grow through the power of compounding.

Throughout any market cycle, people who hold their nerve, remain focused on their long term goals and resist making snap decisions, are likely to be the winners.

Of course, every investor has a different set of circumstances and objectives. If you are wondering how to best apply these “lessons” to your situation/portfolio a HL B Mann Judd financial planner can give you sound advice.