Investing globally offers many compelling benefits, but investors need to be prepared for the risk and volatility that comes with it. A long-term strategy and staying invested will help reduce your risk – in other words, relying on time in the market instead of timing the market.
Before starting any investment, you need to first make sure you’re prepared for the investment risk it brings. Investment risk is the likelihood that, at some point during your investment journey, you’ll experience losses rather than expected profits because the price of the underlying assets you invested in has gone down.
When it comes to investing in general, and specifically globally, it’s important to understand ways to manage this risk – both for the sake of your returns, and for your peace of mind.
What is volatility and how do you counter it?
In investment terms, volatility describes the speed and amount of price changes. When the price or value of assets, shares or currencies move fast, dramatically and often, they’re called volatile – and are generally considered more risky.
Equity markets can be volatile over the short term, meaning that they go through periods of rapid growth, but also periods of underperformance. However, over the medium and long term, global equity markets trend upwards. When you move your time frame from days and weeks to months and years, the volatility changes into steady gains, as the trend of global growth delivers profits to investors.
The problem is that many investors make the mistake of buying and selling investments based on short-term market movements. This is an attempt to ‘time the market’ – but it rarely works. Inevitably, retail investors end up selling when markets are low or buying assets when their price is high. Adopting this strategy of ’timing the market’ almost always leads to lower returns and more emotional anxiety: it is a bad idea.
Expect volatility, and widen that time horizon
The fact is, you should expect offshore equities to be volatile in the short term. The risk element of offshore equity investing is what generates the returns. However, because markets trend upwards consistently, we can be confident that if and when we experience short-term volatility, it will be replaced with growth over the long term.
The more time you have to invest, the less relevant short-term volatility becomes, and the more important the long-term trends which drive company profits globally – and produce investment returns – become.
So, while investing in offshore equities can potentially deliver much better returns compared with keeping your cash in the bank, you still need to think twice before taking on the extra risk if you don’t have at least six or more years to let your investments grow. Your investment might experience short-term volatility, and you won’t have the time to let trends correct the losses and provide positive returns.
The importance of ‘staying the course’
One way to resist the temptation of buying and selling at the wrong time is to understand no one can predict the future, and long-term trends are what power long-term returns. The returns offshore investors set out to receive can only be realised with a properly diversified portfolio that’s invested for the long term. Time can be a powerful weapon to counter volatility and increase your chances of a strong return.
This is where a trusted financial adviser is crucial. These professionals can help you stay the course by providing objective guidance when volatility in markets make you doubt your strategy. In other words, they can help ensure you don’t make bad short-term decisions with a lasting long-term impact.
This article is not financial advice. Please consult with a financial adviser for financial advice.
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