Register For Our Mailing List

Register to receive our free weekly newsletter including editorials.

Home / 467

A tonic for turbulent times: my nine tips for investing

Dr Shane Oliver, AMP’s long-standing Chief Economist and member of the AMP Investments team, has witnessed numerous economic cycles and market events in his more than 35 years as a leading economist. His Nine Tips for investing are particularly relevant amid the current market turbulence.

1. Compounding

Compound interest is magical! The value of $1 invested in 1900, allowing for the reinvestment of dividends and interest along the way, would now be worth $243 if invested in cash, $901 if invested in bonds and $757,136 if invested in shares. If you want to grow your wealth, you should have exposure to growth assets like shares and property.

2. Diversify

The best performing asset class each year can vary dramatically – last year’s top performer is no guide to the year ahead. Have a combination of asset classes in your portfolio. This particularly applies to assets that have low correlation, i.e., that don't just move in lock step with each other. A well-diversified portfolio is less volatile.

3. Understand risk and return

Put simply: the higher the risk of an asset, the higher the return you should expect to achieve over the long-term, and vice versa. There is no free lunch, and you should always allow for the risk and return characteristics of each asset in which you invest. If you don’t mind short-term risk, you can take advantage of the higher-returns growth assets offer over long periods.

4. Time-in, not timing

In times of uncertainty its temping to try to time the market. But without a proven asset allocation or stock picking process, it’s next to impossible. Market timing is great if you can get it right, but without a process, the risk of getting it wrong is very high and can destroy your longer-term returns. Selling after big share market falls can feel comfortable given all the noise is negative but it locks in a loss and makes it much harder to recover from.

5. Time is on your side

Since 1900 there are no negative returns over rolling 20-year periods for Australian shares. Short-term share returns can sometimes see violent swings, but the longer the time horizon the greater the chance your investments will meet their goals. In investing, time is on your side, so invest for the long-term.

6. Remove the emotion

Emotion plays a huge roll in amplifying the investment cycle, both up and down. Avoid assets where the crowd is euphoric and convinced it’s a sure thing. Favour assets where the crowd is depressed, and the asset is under-loved. Don’t get sucked into the emotional roller coaster.

7. The wall of worry

It seems there’s plenty for investors to worry about at the moment. While this is real and creates uncertainty, in a long-term context its mostly noise. The global and Australian economies have had plenty of worries over the past century, but they got over them. Australian shares have returned 11.8 per cent per annum since 1900. Turn down the noise around the short-term movements in investment markets.

8. Look less

Day by day it’s pretty much 50/50 if share markets end up or down. On a monthly basis, they finish up two thirds of the time. On a calendar year basis, using data back to 1900, this increases to 80 per cent. The less you look at your investments, the less you will be disappointed, and the less likely you’ll sell at the wrong time.

9. It’s cyclical

The higher returns shares generate over time relative to cash and bonds is compensation for periodic short-term setbacks. Recognise that these setbacks are part of the cycle. Don’t get thrown off the higher returns that shares and other growth assets provide over the longer-term. Cycles are a fact of life and, while they don't repeat precisely, they rhyme.

 

Dr Shane Oliver is Head of Investment Strategy and Chief Economist at AMP and AMP Capital. This article has been prepared for the purpose of providing general information, without taking account of any particular investor’s objectives, financial situation or needs. 

 

8 Comments
David Atherton
August 14, 2022

When investment experts talk about how well the share market performs over time, they usually use an index such as the All Ordinaries index as the benchmark to support their argument. But this conveniently ignores the fact you can't really invest in an index. Ie You can’t make an investment that performs exactly in line with the Index. This is because the selection of companies that make up the index keeps changing over time. To highlight the point, if you had bought shares all the companies in the index as it was in 1900 you would find most of those companies not in existence today.

SMSF Trustee
August 15, 2022

David, not true. Loads of index funds match index returns minus only a very small fee. The changes to index stocks are rules-based and well known ahead of the change, so can be managed for quite easily. There is skill involved, hence the fee, but it is definitely possible.

Lisa Romano
July 30, 2022

The equity in my portfolio that has performed the best is the one I have held the longest, and this tends to mirror property value. However in a world increasingly living with socioeconomic and environmental turmoil, nothing is certain these days.

HDuong
July 25, 2022

Totally in agreement with Dr Oliver.
The nine tips apply to investors of any sophistication.
For unsophisticated investors veering on being passive/lazy, there are always "selected" EFTs to suit individual temperament (criteria 3) and keep them, "never" sell/ trade. This strategy satisfies all nine criteria.
A note though, criteria 4 and 9 can be contradictory. If one knows it's "cyclical" then one should really buy at "low" ie time the buying. Kind Regards.

Danny Casagrande
July 25, 2022

Cash for short term investing.
Bonds and income producing shares for medium term investing.
Shares for medium and long term investing. A mixture of these three for retirement investing is a good strategy.

Sandeep S
July 20, 2022

Nice. The only other point (which may be implicit in the 9 tips) is read widely and consult before investing.

George509
July 21, 2022

I can agree with consult before investing, but the question is who can you trust.

SMSF Trustee
July 25, 2022

Well George509, as the good book says, plans fail for lack of counsellors but with many advisers there's success (Proverbs 15:22). While not a promise, but a principle, that tells me to apply Dr Oliver's item #2 to the process and seek several opinions.
Of course, seek their opinions by asking questions framed in terms of the other principles in Dr Oliver's list. I suspect you'll find that those advisers who don't talk in terms of diversification, understanding risk and return, keeping the emotion out, etc are the ones you will fairly quickly realise are the untrustworthy ones.

 

Leave a Comment:

RELATED ARTICLES

Reflections on four decades of investing

Improving financial literacy for women is a necessity

The BIG picture: portfolios perform for the passive and patient

banner

Most viewed in recent weeks

Vale Graham Hand

It’s with heavy hearts that we announce Firstlinks’ co-founder and former Managing Editor, Graham Hand, has died aged 66. Graham was a legendary figure in the finance industry and here are three tributes to him.

Australian stocks will crush housing over the next decade, one year on

Last year, I wrote an article suggesting returns from ASX stocks would trample those from housing over the next decade. One year later, this is an update on how that forecast is going and what's changed since.

Avoiding wealth transfer pitfalls

Australia is in the early throes of an intergenerational wealth transfer worth an estimated $3.5 trillion. Here's a case study highlighting some of the challenges with transferring wealth between generations.

Taxpayers betrayed by Future Fund debacle

The Future Fund's original purpose was to meet the unfunded liabilities of Commonwealth defined benefit schemes. These liabilities have ballooned to an estimated $290 billion and taxpayers continue to be treated like fools.

Australia’s shameful super gap

ASFA provides a key guide for how much you will need to live on in retirement. Unfortunately it has many deficiencies, and the averages don't tell the full story of the growing gender superannuation gap.

Looking beyond banks for dividend income

The Big Four banks have had an extraordinary run and it’s left income investors with a conundrum: to stick with them even though they now offer relatively low dividend yields and limited growth prospects or to look elsewhere.

Latest Updates

Investment strategies

9 lessons from 2024

Key lessons include expensive stocks can always get more expensive, Bitcoin is our tulip mania, follow the smart money, the young are coming with pitchforks on housing, and the importance of staying invested.

Investment strategies

Time to announce the X-factor for 2024

What is the X-factor - the largely unexpected influence that wasn’t thought about when the year began but came from left field to have powerful effects on investment returns - for 2024? It's time to select the winner.

Shares

Australian shares struggle as 2020s reach halfway point

It’s halfway through the 2020s decade and time to get a scorecheck on the Australian stock market. The picture isn't pretty as Aussie shares are having a below-average decade so far, though history shows that all is not lost.

Shares

Is FOMO overruling investment basics?

Four years ago, we introduced our 'bubbles' chart to show how the market had become concentrated in one type of stock and one view of the future. This looks at what, if anything, has changed, and what it means for investors.

Shares

Is Medibank Private a bargain?

Regulatory tensions have weighed on Medibank's share price though it's unlikely that the government will step in and prop up private hospitals. This creates an opportunity to invest in Australia’s largest health insurer.

Shares

Negative correlations, positive allocations

A nascent theme today is that the inverse correlation between bonds and stocks has returned as inflation and economic growth moderate. This broadens the potential for risk-adjusted returns in multi-asset portfolios.

Retirement

The secret to a good retirement

An Australian anthropologist studying Japanese seniors has come to a counter-intuitive conclusion to what makes for a great retirement: she suggests the seeds may be found in how we approach our working years.

Sponsors

Alliances

© 2024 Morningstar, Inc. All rights reserved.

Disclaimer
The data, research and opinions provided here are for information purposes; are not an offer to buy or sell a security; and are not warranted to be correct, complete or accurate. Morningstar, its affiliates, and third-party content providers are not responsible for any investment decisions, damages or losses resulting from, or related to, the data and analyses or their use. To the extent any content is general advice, it has been prepared for clients of Morningstar Australasia Pty Ltd (ABN: 95 090 665 544, AFSL: 240892), without reference to your financial objectives, situation or needs. For more information refer to our Financial Services Guide. You should consider the advice in light of these matters and if applicable, the relevant Product Disclosure Statement before making any decision to invest. Past performance does not necessarily indicate a financial product’s future performance. To obtain advice tailored to your situation, contact a professional financial adviser. Articles are current as at date of publication.
This website contains information and opinions provided by third parties. Inclusion of this information does not necessarily represent Morningstar’s positions, strategies or opinions and should not be considered an endorsement by Morningstar.