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Some Key Principles to Investing

There is no perfect answer on how to invest when the markets are choppy

Be sure to ask your investment advisor or retirement specialist any questions you might have regarding performance or investment allocation.

Let’s be serious. Anyone who has opened a recent pension statement or logged in online to look at their investments recently has gotten a slap in the face. They are down – and some more than others. Gritting our teeth and turning our head away trying to rationalize the concept of having time on our side to recover is becoming harder; for most of us these funds were generated through our own blood, sweat, and tears, scrimping and sacrificing for a better financial future, only to have a series of globally-occurring uncontrollable situations strip us of this vision (insert sad face).

Although there is no crystal ball, or magic eight ball, or horoscope in the Royal Gazette that is going to give you a leg up when it comes to investing, reading financial articles that come from reliable sources should provide you with valuable information as to what challenges global economies are facing in order to make educated investment decisions. But, the key word is reliable sources.

Since facts are often clouded by opinion (therefore generating writer bias), my recommendation is to read financial articles that are not opinion based. Likewise, quality financial articles can be blurred by political propaganda, whereby the writer suggests the economy and investment performance would be markedly different should a specific political party be in office. Either way, financial articles that are opinion based or clearly have a tone geared towards political propaganda rarely hold any merit when it comes to investment decision-making.

Unfortunately, there is no perfect answer on how to invest when the markets are choppy. However, applying some key principles to investing, such as the following, should help guide you:

1. Investing Based Upon Your Goals

What are your goals for investing? Do you remain calm if you are losing money if the market performs poorly for a period of time, or does any sort of investment loss make you nervous? These are the types of questions that will help gauge your tolerance for risk; investors with more time to recoup market losses may be more comfortable taking risks but, as you near retirement or if you’re already retired, you may want to adjust your risk tolerance to make sure your investments are consistent with your goals. That doesn’t always mean being risk free, it could simply mean being more risk aware.

2. Dollar Cost Averaging

Sticking to the discipline of dollar cost averaging can help you avoid making emotional decisions based on market turbulence. With dollar cost averaging, you invest a certain amount of money at regular intervals (e.g., your monthly pension contributions), regardless of what the market is doing. By investing the same dollar amount every month, you naturally buy fewer shares when the market is high and more shares when the market is low – which is the predominant goal with investing.

3. Long-Term Investing

For those who have a longer time horizon, investing with a focus on investing for the long-term is key. It may be tempting to try and time the market (i.e., to buy and sell investments based on what you believe the market is going to do in the future), but the risk of timing it incorrectly is far greater than knocking it out of the park and getting it right. When dealing with a volatile market, the worst days are often closely followed by some good upswings. When you take money out of the market on a down cycle, it’s highly likely you’ll miss the recovery cycle as well. It’s important to remember that time is on the side of the investor and a buy-and-hold strategy historically produces better investment results in the long run.

4. Diversification

Most investors understand the principles of diversification, but many do not apply it to investing. Diversifying investments refers to being mindful about the amount you invest in each asset class; as different asset types react differently to changes in the market, most often we find that while one asset class is struggling to perform, another is likely doing better. The right asset allocation strategy will factor in your goals, risk tolerance, and time horizon. The good news is that most pension providers offer risk models that are diversified and allocated based upon time horizon and risk weighting factors.

At the end of the day it’s important to take an interest in the money you have worked hard to make. Be sure to ask your investment advisor or retirement specialist any questions you might have regarding performance or investment allocation. However, it is also important to recognize that any recommendations being given are recommendations; it is you, the investor, that ultimately makes the final decision.

Carla Seely is the Chief Operating Officer at Freisenbruch

If you would like any further details please contact cseely@fmgroup.bm or call 441 297 8686.

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