By Luke Sheehan. BJT Private. Australian Unity Personal Financial Services.
Investment volatility is the risk of the value of your investment moving up and down. With high quality investments, their values should move up more than they go down.
Investments which are expected to produce higher long term returns (such as shares) tend to experience higher levels of short term volatility.
On the other hand, investments which are expected to generate lower long term returns (such as bonds) usually experience less volatility in the short term.
This can be seen in the charts below which show the range of historical returns for various asset classes over various periods, as well as their long term average returns. As you can see, the longer you hold your investments the less they are affected by volatility. For example, the range of returns for Australian shares in any single year has been -42.4% to 71.3%. However, the range for 10-year periods has been 2.6% to 18.2% p.a.
Note: Investors who redeem their investments after a fall in value turn a notional loss into a permanent loss. If they are high quality investments, this is usually a poor decision, because high quality investments should recover from falls in value.
How you can manage investment volatility
Investment volatility can be managed using three prudent principles of investing:
- Only invest in high quality investments
- Construct a properly diversified portfolio
- Regularly review your investments to ensure they continue to maintain their quality.
^Luke Sheehan is an Authorised Representative of Australian Unity Personal Financial Services Limited (AUPFS) ABN 26 098 725 145, AFSL 234459. This information has been prepared by AUPFS. The taxation position described is a general statement and should only be used as a guide. It does not constitute tax advice and is based on current laws and their interpretation.
This information has been prepared without taking into account the investment objectives, financial situation or particular needs of any particular person. Because of this you should, before acting on it, consider its appropriateness, having regard to your objectives, financial situation and needs