War and investment markets

The impact of wars on investment markets seems to follow a consistent pattern.

The initial response is a market decline due to uncertainty about the future. Markets generally recover while the war is still on, with some sectors of the economy benefiting from the conflict. Despite the negatives, the long-term market trends are still positive. Wars come and go, and share markets continue over the long term to track upward, often reaching new highs once the crisis is over.

History has shown that in times of volatility, the best strategy is to stick with your long-term goals and focus on long-term returns rather than short-term changes.

Successful investment requires a high degree of emotional detachment and an objective approach to decision-making. News headlines are designed to create an emotional response, which can lead to poor investment decisions. Panic selling causes unnecessary investment losses. The worst time to sell investments is when the market has dropped.

The basic principles of successful investing

It’s an interesting aspect of human psychology that when it comes to buying groceries or household goods, we see price drops as an opportunity to pick up bargains, whereas when investment prices fall, our natural inclination is to want to sell to reduce anxiety. At times like this, it’s important to remember the basic principles of successful investing:

1.    Always keep cash or other highly liquid investments on hand to cover your short-term spending needs so that you can ride out market volatility without having to sell at the wrong time.

2.    Stay diversified. It’s more important than ever in volatile times not to have too many eggs in one investment basket. Diversification spreads your risk.

3.    Invest according to your investment time frame. Funds you don’t need for ten years or more should stay invested in growth assets such as shares and property. It’s almost impossible to pick the highs and lows of the market. Attempting to time the market by selling at the peak and buying at the low point invariably results in lower returns than staying invested.

4.    Take advantage of volatility to use ‘dollar cost averaging’ to invest. Rather than investing a large sum at one point in time at the price on the day, invest small amounts on a regular basis at different prices. This approach reduces your investment risk by averaging the price you pay. 

5.    Stick to quality investments that will withstand unfavourable economic conditions.

Following these basic principles should ensure you achieve the best possible investment outcomes given your particular circumstances. It’s always helpful to talk to a professional adviser to ensure that your investment strategy is appropriate for your goals and the state of the economy.