Ten investing truths

Keep the end goal in sight.

In his legendary rugby career, John Eales proved to be far more than just a great player. As Wallaby captain, his cool head under pressure and absolute focus on the end goal no matter what the score, helped his team win time and again. If there is ever a lesson to be learnt in investing, this is it.

Maintain your composure and stick to your game plan, even in the face of adversity, and you increase your chances of coming out on top.

Whatever the crisis, experience tells us that people who sell when a crisis hits put their money at more risk than those who wait to see how the situation unfolds.

Just look at the performance of international sharemarkets from 1986 to 2004 despite a whole range of events - the 1987 crash, the Asian currency crisis, the Russian bond market default and September 11. Each crisis was just a blip on the long-term ascent of sharemarkets.

Performance of international sharemarkets from 1986 to 2004 (MSCI World Index)

Past performance is not a reliable indicator of future performance.

Sharemarkets do react, often sharply, to crises. Yet they tend to snap back quickly as investors reassess the real economic impact of these events.

So it is important for investors to think long-term when crisis strikes. And there is compelling evidence that panic selling is bad for your wealth in the short-term as well.

For example, during the Iraq invasion of Kuwait in 1990, the S&P 500 dropped around 5% within a month. Within six months, the market was up almost 16%. Within a year, it had leapt 26%.

Maintain your composure. Keep the end goal in sight Economics, nature and human nature being what they are, we will undoubtedly face another market-mauling crisis in the future. And there are still sensible precautions any investor can take to deal with a future crisis. The most important is to have a financial plan - a written document that reminds you why you're investing, what your objectives are and how long you plan to invest for. A financial plan is the perfect antidote to the tendency to panic. It's also a reminder that long-term investors have nothing to gain from short-term reactions. And when you're putting your plan together, seek advice from a specialist who can help you put a crisis into perspective, your financial planner. << Back to Ten investing truths

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