Investopoly Four rules you must follow to ensure you prosper 5 years from now
I wrote a blog in May warning investors to prepare for lots of bad news, uncertainty and market volatility. My thesis was that rising inflation, supply chain issues and rising rates would cause economic pain. Unfortunately, my prediction was correct, and we should expect the volatility to continue for many more months to come.
It is possible that all you may see are risks and problems at the moment. But in 5 years from now, it is likely you’ll look back and see lots of (missed) opportunities because the rear vision mirror is always clearer than the windscreen.
I’d like to share four rules which can help guide you to make great investment decisions over the course of the next year, and the rest of your life.
Missing the best days of the market is a good lesson and a perfect metaphor
There are lots of charts that demonstrate that if you miss the 10 best days in the share market over a long period of time (say 10 years), it will have a dramatic negative impact on your overall investment returns i.e., you will earn half the returns or less. This chart is a good example.
The lesson is that no one can pick the best days and the worst days. Therefore, if you sell your investments because you are concerned about volatility, you will inevitably miss the best days (best returns) and your overall performance will suffer.
Another way to look at it is, that the best returns come in the years following a stock market decline. The chart below, which covers almost one century of data, illustrates this very eloquently (produced by Dimensional).
This concept applies to all markets and asset classes including residential property.
Understand that volatility is normal
The event or issue that causes volatility (i.e., market uncertainty) is always unique and unpredictable. An event must be unpredictable to cause the market to fall dramatically because predictable events/issues are already systematically reflected in share prices.
Volatility is normal and it should be expected. Volatility is a very important part of price discovery which ensures the mark
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