More is not always better

Without a plan, investors often build their portfolios from the bottom-up, focusing on each investment holding rather than the portfolio as a whole, and often lacking the diversification needed to adequately mitigate market risks. Diversification is not necessarily about owning more securities, but rather the right mix of securities. Investing in several bank shares instead of just one may help mitigate single security risk but concentration risk remains high given the single industry focus. Similarly, investing solely in ASX-listed companies increases diversification across sectors but remains concentrated in the local market. Conversely, investing in a broad-based Australian shares ETF such as the Vanguard Australian Shares Index ETF (VAS) alongside another ETF that provides broad international exposure such as the Vanguard MSCI Index International Shares ETF (VGS) is an example of how investors can diversify not only within markets but also across regions. Remember, markets will often behave differently from each other—sometimes marginally, sometimes greatly—at any given time. Owning a diversified portfolio with exposure to different markets allows the investor to participate in stronger performing areas while also mitigating the impact of weaker areas.

 

Focus on what you can control

Lastly, two of the most important qualities to have when it comes to investing are not the ability to pick winning stocks or to perfectly time the market, but rather the ability to maintain both discipline and perspective even when conditions get tough. These two qualities are instrumental in helping investors remain committed to their long-term investment plan through periods of market uncertainty. While deciding on the right asset allocation is one of the cornerstones for successful investing, it only works if the allocation is adhered to over time and through varying market environments. This means ignoring the temptation to alter asset allocations when markets are volatile and succumb to the appeal of market-timing, even when there appears to be visible winners and losers. This is because the opportunities that are clear in retrospect are rarely visible in prospect; investors cannot control nor predict what markets will do but they can focus on their own mindset and approach.