It’s been six years since the worst of the Global Financial Crisis (GFC) hit equity and bond markets. While flow-on effects continue to affect financial markets, there are many lessons from the crisis that can be applied to wealth planning.
Here are five key lessons from the GFC to consider when making investment decisions.
1. Cash needs careful consideration
When the financial crisis started many investors sold higher risk investments such as shares and increased cash holdings. While all investment portfolios should have some allocations to cash, having too much can reduce returns over time. If your investment portfolio is still substantially overweight to cash, now might be the time to consider whether taking this approach will allow you to meet your lifestyle needs in retirement.
2. It’s time in the markets that matters
It’s difficult to pick market cycles. This is why investors benefit from taking a longer-term view to investing. Jumping in and out of the share market increases the risk you will miss the market’s best performing days, which may have a substantial impact on your returns. Even when market downturns occur, if you maintain your investment in shares your assets may increase in value over time.
3. Diversification helps smooth out investment returns
The GFC was an enormously volatile time for share markets. In light of market volatility astute investors have been looking for ways to smooth out returns over time. One of the best ways is to ensure your portfolio includes a diverse array of different asset classes. Markets will always trade with some level of volatility, but taking this approach helps even out the highs and lows over time.
4. Understand your risk appetite before investing
One of the biggest lessons learnt from the financial crisis is to understand your appetite for risk. History shows the returns from equities are considerably more volatile than the returns from less risky asset classes such as cash or fixed income. Hence, if the bulk of your portfolio is held in shares, you need to be conscious that it’s likely the value of your investment will rise and fall to a greater extent than if it was held in cash or fixed income.
5. Develop long-term goals and objectives
When markets are volatile it’s easy to take kneejerk reactions and sell down investments that are underperforming at what could be the worst time to make such sales. Instead of taking short-term decisions about your investments, it’s a better idea to develop long-term investment goals and objectives in line with your financial requirements.
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