Autumn is a great time of year in the northern Spencer Gulf for us fair weather fishermen – lots of calm days, flat water.
Suits me. You won’t find me in a boat out of sight of land or on a rough day. I feel much safer in calm waters and I therefore accept I will probably catch less or smaller fish than those prepared to venture further offshore and endure rougher weather.
It’s exactly the same logic when considering how to invest your hard earned money. Over the long term you will achieve a larger return from growth assets such as Shares and Property compared to defensive assets such as Cash and Fixed Interest.
However to achieve those larger returns you will experience a rougher ride as Shares and Property go through inevitable periods of boom and bust.
How rough can it get before you panic? It is really important you understand your own comfort level. Furthermore, it is really important you understand your own comfort level during times of calm economic activity – while you are still standing on the shore if you like.
Why? because those that take risks greater than they can stand often get panicked into making irrational decisions in the middle of economic storms – such as selling good quality assets at a loss.
A proper Financial Planning exercise will help you understand the level of returns you need earn to achieve your future plans, and then balance this with the level of investment risk you can comfortably bear.
Rarely, if ever, should you take a risk that is greater than you can stand. Preferably, you should consider what alternatives are available for you to reach your goals without increasing your investment risk.
Investors continue to achieve above average returns from quality growth assets since the GFC. Above average returns cannot continue indefinitely. By definition, if you have periods of above average returns, you must then have periods of below average returns for there to be an average.
We are in calm waters at the moment, is your strategy sound?