- On June 25, 2018
Everyone likes to see their investments grow but you need the right mindset to ensure a successful outcome.
But I still come across people who focus overly on the short-term results of their investment decisions.
A good example of this would be where they have another investment that is structured to do something completely different and make comparisons between the two.
An example of this would be ‘My ISA (which is 100% shares) has done really well, why hasn’t my pension fund done as well?’
The simple answer is because they are completely different in terms of investment timescale (medium v long term), they have a different asset allocation (the mix of shares and fixed interest) and for most people one (the pension) is of larger value than the other and supposed to provide an income in retirement.
The aim is to make sure that the returns from your pension, rather than climbing violently and falling violently in value, follow a much gentler path, or, more importantly, as gentle as it needs to be to meet your objectives.
Sometimes it’s difficult for people to see beyond the near term. They forget that with different investments you sometimes have different objectives.
The reaction to change and the desire to secure what is perceived to be a better return causes most people to miss out on the return they deserve by swapping and changing their investments too much.
They react to events and as a result they lose the benefit of a market bounce back by selling when things have already fallen and buying after they have risen.
Each time they buy and sell unnecessarily there is a cost which drags on returns. This cost friction leads to reduced returns.
The important thing is to stay the course. An investment strategy only works if you keep a level head and don’t overreact.
If you’re at all concerned about things speak to your adviser and he or she will say the same.
Short term fluctuations are inevitable but provided you are patient, long-term gains are pretty much inevitable as well.
There are very few ten, fifteen or twenty-year periods where cash will have outperformed shares. The longer you’re able to stay invested and be patient the more likely you are to get the return you deserve from committing your money to the capital markets and investing in shares and fixed interest.
Remember, the value of your investments can go down as well as up. Past performance is not a reliable indicator of future outcomes.
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