5 steps to keep your eyes on the prize
My big concern is that the mixed messages from economists and politicians will distract us from setting a long term investment strategy and sticking to it.
Five steps can help us stay focused on personal goals.
Jot down your assets and liabilities
Hopefully your net wealth (assets less liabilities) has grown in recent years. Increasing your net wealth is obviously a good thing, but be careful about the unrealised growth in the value of your assets. This can disappear just as quickly as it came.
If, for example, your home has grown in value by $80,000 but you’ve taken on an extra $60,000 in debt, you could argue that you are $20,000 better off. Be careful though. You have $80,000 in unrealised gains, which can disappear, but the $60,000 in debts won’t.
Analyse your cashflow
Take care about running a deficit budget and covering the hole with credit card debt, personal loans and buy now, pay later. Running deficit budgets doesn’t work for governments and it won’t work for you either.
Set up a disciplined investment plan
Don’t try to time the market. It’s a mug’s game. As the old saying goes, it’s time in the market – not timing, that counts.
Diversify
Holding just a couple of blue chip stocks is no longer a logical strategy in a time of dramatic change. Some household name companies of the past have been overrun by rapid change – remember Kodak or Blockbuster Video?
Diversifying your portfolio across hundreds of Australian and international shares has never been easier thanks to exchange traded funds and low cost brokerage.
Stick to your plan
Don’t let the volatility that looks set to continue through 2022 distract you from your longer term goals. Focus on what you can control – how you manage your money.
The one constant – the ageing of our population, continues at a cracking pace. And about the only thing I can guarantee in the future is that unless you’ve got a healthy pool of investments to draw on when you choose to, or are forced to, stop work, the quality of your lifestyle could dive as rapidly as the UK pound. But unlike the pound, your lifestyle won’t recover.
Paul Clitheroe is Chairman of InvestSMART, Chair of the Ecstra Foundation and chief commentator for Money Magazine.
Frequently Asked Questions about this Article…
Having a long-term investment strategy helps you stay focused on your personal financial goals, despite mixed messages from economists and politicians. It ensures that you are not swayed by short-term market volatility and can maintain a disciplined approach to growing your wealth.
To assess your financial situation, jot down your assets and liabilities. Calculate your net wealth by subtracting liabilities from assets. Be cautious of unrealised gains, as they can disappear quickly, unlike your debts.
Running a deficit budget can lead to accumulating debt through credit cards, personal loans, and buy now, pay later schemes. Just like it doesn't work for governments, it won't work for you either, as it can jeopardize your financial stability.
Market timing is considered a 'mug's game' because it's extremely difficult to predict market movements accurately. Instead, focus on 'time in the market' to benefit from long-term growth and compounding returns.
Diversification reduces risk by spreading investments across various assets. It protects you from the downfall of individual companies, as seen with Kodak or Blockbuster. Exchange-traded funds and low-cost brokerage make diversification easier than ever.
During volatile times, focus on what you can control, such as managing your money wisely. Avoid being distracted by market fluctuations and stay committed to your long-term investment goals.
As the population ages, having a healthy pool of investments is crucial for maintaining your lifestyle when you retire. Without it, your quality of life could decline significantly, unlike currency fluctuations, which can recover.
Paul Clitheroe is the Chairman of InvestSMART, Chair of the Ecstra Foundation, and chief commentator for Money Magazine. He provides valuable insights and guidance on personal finance and investment strategies.
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