We talk to our very own Chief Investment Officer, Damian Graham about how to avoid short-term thinking and stay focused on your longer-term goals.
The last two years have turned the world as we knew it upside down. How can you keep your focus on the long term and stay on track with your financial plan? We asked our Chief Investment Officer, Damian Graham about getting back to key principles and how to sort the fact from the fiction when it comes to investment opportunities.
Q. What is the most common mistake people make when it comes to investing and choosing investments?
A. One of the most common mistakes is getting distracted by short-term considerations rather than focusing on what really matters in the long term. This is especially true for your super, which is all about long-term returns. A balanced, well-diversified portfolio can help you achieve your objectives.
Your retirement, circumstances and goals are all personal to you - so it’s important to stay focused on what’s important to you and not get distracted by what other people are doing or thinking, or by the latest craze.
What are the key principles to remember when it comes to investing for super/retirement and where can people find information they can rely on?
The first thing is to start contributing early. That way, if things don’t go according to plan, you’ll have more time to recover any losses. Just as important is to spread your risk and take a balanced approach. Cash may seem a safer option in the short term, but it may not provide the returns you need to maintain your lifestyle in retirement. Super is a marathon not a sprint, so it’s crucial to think long term.
Avoid making decisions based on emotion would be another important principle. It’s more fruitful to understand your goals, have a plan for achieving them, and then to stick to it.
And when it comes to finding reliable information, be very aware of following the herd blindly; it might lead you in the right direction, but it could equally lead you to a cliff. Be very wary when you read the media and always consider the credibility of the news source. Would you rather get your information form the Financial Times, the Australian Financial Review, or Twitter?
Why not choose a more stable investment instead of taking a risk with your money?
With life expectancy on the rise, there’s a real possibility that, once you retire, you may need to rely on your savings for up to 30 years or more.
It’s easy to get caught up in short-term market moves, particularly when markets fall. Keeping most of your savings invested in conservative assets, like cash, may seem like a safe option because their price tends to remain relatively stable over time. But focusing on short-term price moves without considering the longer-term impact could mean you lose out as these investments may not grow sufficiently to meet your future needs.
One of the most important risks to consider is the cost of living and general prices rising faster than your savings grow. This is known as price inflation. Inflation erodes the value of money over time.
Investments that are low risk in the short term, may be risky from a longer-term perspective, as they are unlikely to keep up with inflation. However, assets that are riskier in the short term, such as shares, usually turn out to be less risky in the long term as they can grow faster than the rate of inflation and are more likely to provide sufficient funds after you retire.
Growth assets, such as shares, provide opportunities to benefit from the growth of an economy and tend to generate higher returns over the long term, but are more volatile in nature. So, it’s important to consider some growth assets as part of your overall savings mix and manage risk appropriately.
On the other hand, you can also take on too much risk. That’s why a well-diversified, professionally run portfolio can help you maximise the amount you have at retirement while mitigating the risk you have to take on.
What 3 tips do you have for investors who fear they might be missing out?
Fear-of-missing-out (or FOMO) can be emotionally driven – and investing based on emotions can be very risky. It often means you will invest purely on how you feel, without sufficiently considering all the facts and risks involved. To avoid this, my 3 tips would be:
- Take a step back and give yourself time to think without emotion clouding your judgement
- Avoid fads and get-rich-quick schemes that can sound enticing but are unproven or not based on factual evidence – they may be riskier than you realise
- Consider all the risks and opportunities involved and rationally reconsider your views based on the information and advice you’ve received before you act. Make sure they will help you meet your objectives.
Q. Why is a good investment strategy even more important near retirement?
The closer you are to retirement, the more important a clear and appropriate investment strategy is. Near retirement, you will generally have less ability to bear risk and less time to recover from any fall in the value of your super.
This is also typically when your retirement savings are at their highest value, making them more vulnerable to losses when markets fall. An unfavourable sequence of returns or large losses around the time of your retirement can have a lasting impact.
If you retire while markets are strong and continue to earn strong returns into the early part of your retirement, your account may grow large enough to be able to withstand any subsequent downturn, even as you withdraw your regular income. However, if you retire during a large market fall, the need to withdraw funds from a lower level of savings makes it much harder for your savings to recover, reducing the income available to fund your lifestyle in retirement.
The right strategy will very much depend on your individual circumstances and can be complex. It’s all about understanding what your goals are and then investing in a way that will help you meet those goals, while still ensuring you have the peace of mind you need to enjoy your retirement.
We’re here to help
Aware Super financial planners are specialists in the SASS scheme and investing for retirement. Book an obligation-free appointment to understand your options and check that your investment choice and strategy is right for you. Call us on 1800 620 305.
