Don’t let volatility Trump your investment plans

Note: This post was originally published and sent to our clients on November 10, 2016, the day after Donald Trump was elected President. At that moment, global stock markets were falling, and many investors were panicking. We’re reposting now — unedited — our advice to hold through volatile times. Thankfully, the overwhelming majority of our customers did continue to hold their investments, and have been rewarded with significant growth since November 2016.

As you’ve no doubt heard by now, the impact of the US election result is moving through financial markets around the world.

Financial markets had, as with most pollsters, predicted a win for Hillary Clinton, but as the count continued and it became apparent that Donald Trump would secure the Presidency of the United States, both foreign exchange and share markets retreated.

While US markets were already shut, polls started to lean toward a Trump victory. The Asian stock markets were the first to react negatively. The Australian stock market fell close to 2%, and indicators suggested that the American S&P500 would fall heavily when it opened last night. This morning we woke, however, to see the S&P500 back above pre-election levels. Now, Australian and Asian markets are also up significantly.

There is no doubt that we are experiencing a period of heightened market volatility. Financial markets are forward-looking by nature, and in the case of the US election, as with the June Brexit vote in the UK, markets had anticipated one outcome and received another.

Investing by its nature deals with the future and thus uncertainty, and at present the world looks a more uncertain place. The markets may continue to move dramatically in the next few days and weeks based on speculation of Trump’s economic, social and monetary policy.

So what should worried investors do?

Our advice, and what history shows, is you should stick to your investment plan, and resist the temptation to time the market. It might be boring, but it works.

History shows that share markets rise over the longer term, driven by economic growth, productivity improvements and the innovative spirit of enterprise. As the chart below shows, over the past 20 years the S&P/ASX 200 index has returned an average of 8.7% per year.

GRAPH: 20 years of ASX returns

It’s human nature to try to time the market (just as it’s human nature to try to predict the outcomes of elections!). What we’ve seen time after time — from the market crash of 1987, the Tech bubble of 2000, the Global Financial Crisis, Brexit (below) and now the surprise US election result, is that disciplined investing, setting the right long-term strategy, and then sticking with it through the occasional bump in the road is the key to building wealth sustainably over the long term.

GRAPH: The Brexit fall and recovery

Our aim is to help you to build wealth in a sustainable and disciplined manner.

Here are two ways Clover helps you get ahead:

Diversification: Your investments aren’t reliant just on one stock or sector — they’re diversified globally across different asset classes and geographical locations. Clover portfolios hold thousands of individual securities, including shares, bonds and cash. These tend not to move in the same direction at the same time, helping insulate our portfolios from the impact of falls in any one asset class.

Monthly Deposits: If you make monthly deposits, continue to make your deposits regardless of whether the market is up or down. You will benefit from “dollar cost averaging”, whereby if markets fall, you’ll buy more of the market while it’s down. Dollar cost averaging is one of best ways to make volatility work in your favour, and is why we think an investment strategy with a regular contribution plan is a great way for most investors to build wealth sensibly over time.

In summary, many investors will be feeling anxious at present. It’s a perfectly human response to the heightened uncertainty we now seem to be in. How you respond right now has an impact on how successful a long-term investor you’ll be.

You can’t control the market, but you can control your behavior. If history is any judge, trying to time markets is the path to lower, not greater, wealth over the course of the average investor’s life.

Think long term, ignore the current short-term investment noise, and your future self will thank you.

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