After over a decade of solid returns, in recent times investors have experienced a pandemic, rising inflation and interest rates, global conflicts, political uncertainty, energy transition and potentially a global recession. Investing can be challenging.

We invest to preserve and grow the purchasing power of our capital. Even if inflation is contained at 2.5% p.a., your wealth will still lose around half of its purchasing power after 30 years if invested in cash (Ashley Owen, “The Wealth destroying impact of inflation” 2022).

Long term investment success requires developing habits to reach your investment goals. A balanced portfolio has delivered returns of around 7% per annum (“p.a.”) over the past 25 years. That is around 4.4% p.a. above inflation (Australian Consumer Price Index).

Developing sound investment habits will help to preserve and grow your invested capital over time to provide returns to support your retirement or investment goals.

According to a 2011 study of 205 students in Germany we all have about the same basic level of commitment (Resnik, B, 2016). That is, we are all equally vulnerable to distractions, if put in a similar situation. But those that are good at committing to a goal and do not let distractions get in the way “take pleasure in completing the job that they committed to and focus on the pleasure of achieving that goal. Over time, this becomes a habit” (Gaskell, K, “Inspired Leadership” 2017).

At Vantage, we think that successful investors have 3 habits that assist when investing in all types of markets – but this holds particularly true in challenging markets.

1.Investment Strategy

We see a well thought out Investment Strategy as the key to successful long-term investing. If you have this wrong, everything else will falter. Here the focus needs to be on your level of comfort with risk and return. For example, if you are paying yourself a pension from your retirement savings, it may be that your focus is on capital preservation and incremental growth in the value of your portfolio, supported by cash, term deposits and assets that generate consistent income. Your objective over a five year plus time horizon may be to generate returns that exceed inflation plus around 3% with a portfolio of assets roughly half invested in defensive assets (cash, term deposits and bonds) and the other half in growth assets (Australian shares, international shares, property and infrastructure).

For younger investors, it may be that you are happy to have a greater exposure to growth assets given your investment time frame is significantly longer. Here you may have a greater exposure to growth assets (say 70%) when compared to cash and deposits (around 30%). Compared to clients in the pension phase, this sort of exposure is likely to generate superior returns (inflation plus 4%), but is it also likely to generate greater volatility.

Irrespective of the mix between defensive and growth assets, investing in quality assets over the long term is essential.

2.Investment Process 

A well thought out investment process, in the context of owning shares, is one that identifies companies that have;

This process will lead to holding high quality businesses that will give you every chance of protecting your capital and growing the value of these assets over a 5 year plus time horizon.

3.Cash 

This is the final piece in the puzzle. If your investment strategy is right, you will have sufficient cash (and defensive assets) to help buffer your portfolio from market volatility. This will give you confidence to hold quality assets through the cycle.  It will also ensure you have the ammunition to add to quality growth assets if the market sell-off throws up good buying opportunities. For those in the pension phase an appropriate level of cash will ensure that you can continue to make pension payments and prevent you from selling assets at depressed prices.

Markets move in cycles, and this can make us feel uncomfortable when asset prices fall. By developing the three investment habits of having the right investment strategy, a solid investment process and holding the right level of cash, investors significantly increase the likelihood of achieving their investment goals.


About the Author:

Matt McCarney | Financial Advisers Perth | Vantage Wealth Management

Matthew McCarney – Executive Director – Vantage Wealth Management

Matthew is an Executive Director of both Vantage Wealth Management Pty Ltd and VWM Financial Services Pty Ltd. Matt holds a Bachelor of Commerce from the University of Wollongong with majors in Industrial Relations and Management Studies. Read Matt’s full bio here.


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