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8 volatility lessons all Aussie investors need to know

Ups and downs in the stock market are nothing to be feared – in fact, they’re to be expected. (Photo: Getty)

Forecasts for 2019 have indicated that lingering volatility from the year prior will be sticking around for a while yet.

So in an environment where the only sure thing is uncertainty, how can investors protect their portfolios?

Well, one of the most dangerous things to a person’s investments are, in fact, themselves: being too jumpy at the slightest sign of bad news will make you a worse investor (millionaires know this, and so do the world’s most famous investors).

In such a volatile environment, here’s what Fidelity International’s investment experts advise you to bear in mind:

1. Volatility is a normal part of long-term investing

Financial markets hate uncertainty and are also prone to over-reacting to events that may only have an impact in the short-term. So take a step back and be prepared for volatility, and you’ll be less likely to react irrationally.

“By having an open mindset and a longer-term investment perspective that accepts short-term volatility, investors can begin to take a more dispassionate view,” Fidelity International’s experts said.

“Not only does this help with the job of staying focused on long-term investment goals, it also allows investors to begin to exploit lower prices rather than lock in losses by emotionally selling at lower prices.”

2. In the long-term, risk-takers will be rewarded

Unlike sovereign bond investors, equity investors are generally rewarded for the extra risk they take.

In the long term, stock prices are driven by corporate earnings and have generally outperformed other types of investment in real terms, i.e. after inflation, Fidelity International experts said.

3. Market corrections means opportunities

Expect to see more than one stock market correction over the course of a ‘bull’ market, and it’s often a great opportunity to invest in choice stocks to generate above-average returns when the market rebounds.

4. Don’t stop and start investments

If you’re a long-term investor, you’re in it for the long haul!

When investors try to time the market and stop-and-start their investments, they can run the risk of denting future returns by missing the best recovery days in the market and the most attractive buying opportunities that become available during periods of pessimism, Fidelity’s investment experts said.

So if you miss out on just five of the best performance days in the market, your long-term returns could be seriously impacted.

5. Diversify, diversify, diversify

The principle of this is straightforward and follows the same logic as ‘don’t put all your eggs in one basket’.

If things go bottoms-up in a specific market or sector, holding a mix of risky assets (e.g. equities, real estate and credit) and ‘defensive’ assets (government bonds, cash) can mean the brunt of a market downturn can be softened by other investments.

6. Find quality dividend-paying stocks

For a stable source of income during volatile market periods, dividends paid by high-quality, cash-generating companies like leading global brands can stand the ups and downs of market cycles thanks to their established market shares, strong pricing power, and resilient earnings streams.

7. Reinvest your dividends

Reinvesting your dividend payments can not only boost your total returns over time, but support share price stability and protect against inflation.

8. Don’t get swayed by sentiment

Remember the crypto-craze? It wasn’t just a fad among young investors, but even greying nan-and-pop investors asked their financial advisers about Bitcoin – and look how that turned out.

But there’s also something to be said about growing trends like population growth, e-commerce and healthcare that are supporting the growth of certain companies.

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