The March share market rally has enticed some of those investors who pulled their money out to think about putting it back in. The trouble is the rally may not be sustainable and even if it is, by the time they re-enter it will already have risen more than 20 per cent from the trough. Investing is a lifelong journey. It is not something we can precisely time. 

With large daily movements in financial markets plus the prospect of a looming global recession it can be tempting to take a sideways step from the investment journey and try to rejoin once the markets appear to recover. History shows us that booms and busts have been happening for a long time; jumping in and out never works. By the time we get back in it is usually too late. Investors will live through periods of both euphoria and depression during their investment journey. It is pointless trying to second guess to avoid downturns. 

At times we lose sight of the relationship between risk and return. We need to be prepared for both the good and bad years and appreciate that the investment experience involves years when our investments fall in value. The key here is to avoid putting all our eggs in one basket or having an over-concentrated portfolio. We need to have an all-weather approach by holding a broad range of investments within different asset classes – best achieved by diversifying across a range of domestic and international shares, property, bonds and cash. 

When markets were booming, the dream of riches caused too many of us to throw caution to the wind. Too often investors enter markets after they have already performed strongly in the belief that these returns will continue indefinitely. This overconfidence rarely bears fruit. History is punctuated with markets crashes following periods of strong returns and inevitably those who invest only after markets have performed strongly end up being the ones who get hurt the most when the market bubbles burst. Many who lived through the Great Depression, the Poseidon bust of the early 1970s, the crash of 1987 and the tech wreck of 2000-02 were scared away from investing forever after suffering significant losses.

Paradoxically, after all these downturns, the returns for the following years were some of the best we ever experienced. Some people eventually returned to financial markets but only after the markets had recovered too much to make it worthwhile. We need to learn to be sound investors and not just speculators. Taking time to learn about investments, along with the benefits of diversification and planning, will help us avoid the expensive tuition fees served up by markets when they teach us a lesson. Large falls in financial assets over the past 18 months have caused many investors to “throw in the towel” even though many shares are now priced at a substantial discount. Warren Buffet famously summed up that investors should “be greedy (buy) when others are fearful and be fearful (sell) when others are greedy”. 

More important than looking at what will occur in the next six months, it is critical to understand that the next six years hold enormous promise as markets often recover sharply when they do start to pick up. Having a longer time frame puts our investment decisions into perspective. Over time the purchase price of a growth asset may vary and it certainly does take courage to maintain a strategy during a prolonged period of falling markets. In spite of this we are rewarded by being able to purchase more units at lower prices if we have additional cash at these times. A balance between shares and fixed interest and rebalancing will be the best way through the crisis.