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22 Feb 2021

The 7 steps to successful investing

By Simson Sanaphay, chief investment strategist for Citi Australia How to invest in the new year? It's not a time to sit on the sidelines as the world tackles the pandemic and economies start firing up for growth.

Investment markets move in cycles, providing some predictability to how markets should perform in known environments, like times of prosperous or constrained economic growth, high inflation or elevated interest rates.

While COVID-19 kicked off a new investment cycle we do not have the normal parameters in place that we would expect. For instance, past experience suggests we should be in a period of high interest rates, obviously we are not, and in fact globally interest rates are at record lows.

We have redrawn the standard equities-focused investment cycle clock and added in credit to give a more holistic overview of market cycles

An infographic displaying important aspects of U-L shaped recovery Vs V shaped Financial market recovery.

 
Source: Citi as of October 2020

The big change this time round is the extraordinary government intervention that has been required to manage the economic chaos caused by COVID-19. It was also the pandemic that ended the previous economic cycle and started the new one.

This intervention will remain with us for some years, according to commentary from leading regulators like the Reserve Bank of Australia.

But not everything has changed. Investment themes arose during the pandemic and coming out of it new themes are emerging. No matter where we are in the investment cycle there are always opportunities, however, in times of uncertainty and volatility, it's more important than ever to regularly review your investment portfolio.

As you undertake your review consider our 7 steps to ensuring your investments are successful:

1. Understand your risk profile - Ultra low interest rates have pushed investors up the risk scale to achieve the returns they need. Ensure the overall makeup of your portfolio remains within your risk tolerance, and that your portfolio has not become too concentrated in a particular asset class, like equities.

2. Diversification - It's never wise to have all your eggs in one basket. A spread of assets in your home market, regionally and globally ensures you create the best environment to manage market turbulence, and potentially recover faster. 

3. Don’t try and time financial markets – it’s a fool’s game.

4. Review your portfolio as events unfold - By doing so quarterly or at least semi-annually, your portfolio should add assets when markets are cheaper and tilt towards markets likely to recover faster. As markets rally, such portfolios are likely to garner better risk-adjusted returns.

5. Ensure a robust risk management regime to cope with volatile conditions - You can help preserve the safety and return potential of your portfolio this way.

6. Playing the market - If you have capacity, consider a small allocation within your portfolio to allow you to invest during unusual events and short-term market dislocations.

7. Seek advice more frequently - let us help you understand the data, and interpret the guideposts.

We prefer a balanced portfolio that allows diversification to play its role as a modifier of risk, and includes income assets, like corporate and selective high yield bonds, that provide cash-flow stability. This is especially true with rates and yields sitting at the bottom of the curve, and we expect it to remain this way for several years.

Equities remain an important part of asset allocation and will form an increasing percentage of a portfolio as the recovery gains traction, however, it’s likely many investors are sitting on equity portfolios built up in the previous economic cycle, and require adjustment to suit the next set of anticipated thematic trends.

We maintain our view to remain allocated through the investment cycle, as sitting on the sidelines means you miss out on the best days in the market, which may mean forgoing initial recovery periods that can often include healthy indices increases.

Wealth Solutions

Any advice is general advice only. It was prepared without taking into account your objectives, financial situation, or needs. You should also obtain and consider the relevant Product Disclosure Statement and terms and conditions before you make a decision about any financial product. Investors are advised to obtain independent legal, financial, and taxation advice prior to investing. Past performance is not an indicator of future performance.

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