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What you need to know to protect your investments in uncertain times

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Investors buckled in for a wild ride in the first weeks of February as US stocks suffered one of their worst slides since the global financial crisis.

The Australian share market also experienced its biggest one-day fall in more than two years when about $66 billion was wiped from its value just six days into the month. If there is one lesson for investors, it is to expect the unexpected.

The sentiment is further emphasised by the series of shocks that have shaken up the world’s stock markets over the past decade. The unexpected Brexit vote in June 2016 sent tremors through the UK market and Trump’s surprise victory in the US presidential election rattled Wall Street several months later.

Years earlier, economists were drawing comparisons between the financial crisis of 2007-2008 and the Great Depression of the 1930s.

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While Australia arguably fared better than many of its international counterparts, local shares were not immune. When describing the impact of the GFC, the Reserve Bank of Australia noted that the large decline in equity prices reduced the wealth of Australian households by nearly 10 per cent by March 2009.

“Markets don’t like uncertainty,” says Ian Helmore, certified financial planner and senior adviser at Crosby Dalwood in Adelaide.

“The bottom line is there is always going to be volatility, so you need a clear strategy in place.”

Diversify your funds

The ASX represents less than 2 per cent of the world’s market capitalisation so, Helmore says, it makes sense for investors to add international stocks to their portfolio.

“The reality is Australia is a blip in relation to the overall international market,” he says.

One way to safeguard your investment from international volatility is to reduce your exposure to individual markets. In addition to spreading your stocks across a range of countries, Helmore suggests considering where a company derives its income.

“If you’re considering investing in a company, look at where it makes most of its money, not just where it is based,” he says.

“A company like Apple, for example, is based in the US but it makes money all around the world.”

Joe Stephan, independent financial adviser with Stephan Strategic in Melbourne, says another tactic is to spread your investments across both established and emerging markets.

“If you think about countries such as China or India, they are growing exponentially and they present a lot of opportunities [for investors],” he says.

Helmore adds that emerging markets such as Russia and Brazil are also ones to watch, however diversification is still an important consideration.

“Emerging markets are going to have volatility, so you don’t want all of your investment in them and you need to accept that if you’re looking for higher returns, there is often going to be higher risk.”

Don’t create your own volatility

It should be fairly obvious – it’s essential that you don’t become complacent when it comes to your investment. You can’t simply sit back and wait for the money to roll in – it’s not how it works.

By its nature, the stock market can be volatile. There are times to sell and times to buy. Regardless of your investment strategy – be it long-term, short-term or a mix of the two – it is important that you monitor your investments closely, especially in uncertain times.

While most people can’t predict what the stock market is going to do, you are still in control of where your money is invested.

It is, however, absolutely critical that you don’t let emotion rule your investment strategy.

“As investors, it’s important for each of us to know the emotional triggers that can affect us when it comes to investing,” Chris White, author of Working with the Emotional Investor: Financial Psychology for Wealth Managers, said last year.

“Such self-awareness can keep us from making rash choices in some cases — for example, dumping all of our stock when the market is turbulent and tanking.”

In uncertain times, these emotional triggers can be amplified, so it’s essential that investors keep a cool head when it comes to their investments.

For Helmore, the key to protecting your assets comes down to one thing: Diversification.

“A smart investment strategy includes having a… diversified portfolio without all your eggs in one basket,” he says.

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