Investing for long-term growth and income, despite market volatility.

Updated: May 18

Some enduring truths to start with:

  1. Growth investment markets are very volatile in the short term. They go up and down every day, week and month.

  2. Growth investment markets go up (a lot) in the long term.

  3. There is no escaping these unchanging yet ever surprising realities.

If you’ve worked hard to build wealth inside your superannuation and are approaching the need to live off your accumulated wealth (or already are) – this can be a worrying and stressful endeavour.

Deriving income each month is important, but ensuring your capital grows over time by at least inflation, is also important.

However, with an ultra-low interest rate environment which is likely to continue for the medium to long-term – safe havens like cash in the bank and term deposits are disappointing at best. They simply aren’t delivering the returns to produce an income to live by, let alone grow your capital over time.

The first step is to acknowledge that you don’t need all of your capital right now. You certainly do have all of your capital to look after, but you won’t need to access it all this year. You only need a portion. The vast majority of your wealth won’t be needed until many years down the track.

If you don’t need the majority of your wealth in the near future, any characteristics of investments that exhibit in the short-term – are irrelevant and should be ignored.

For instance, a term deposit characteristic is that in the short-term, there is very low volatility and can be called ‘safe’. However, if you intend to invest for the long-term, this short-term catachrestic is meaningless. Similarly, when considering a diversified share portfolio, the short-term nature of this investment is that it will be very volatile. But again, this short-term characteristic is irrelevant as you don’t need the money immediately.

If you are investing the majority of your wealth for the long-term, what really matters is the long-term characteristics of that investment.

For instance, term deposits have fairly low volatility, which is good for the long-term. However, these tend to fail to return above, or even at, inflation. This means that the real value of your capital becomes less and less over time – or at best goes nowhere.

However, if you are investing in a diversified growth portfolio made up of Australian stocks, international stocks and property, the long-term characteristics are also that you will have fairly low volatility. Pick any 5-7 year period from a diversified growth portfolio and you will predictably get a strong positive return. But the best part is, this positive return will invariably be far greater than inflation, meaning your wealth has grown in real terms.

Therefore, if you are deriving an income from your wealth, set aside the portion of that wealth which you will need in the next 5-7 years, and put this into cash and term deposits. This means you will avoid short-term volatility with your money that you might need in the near future. You can’t afford it to be ‘down’ the day, or even the year, that you might need it.

The rest of your wealth (the majority), can be confidently invested into growth investments that, despite irrelevant short term volatility, will ensure that your wealth is worth more than it is today than in 5- 7 years’ time when you’ve run out of cash and term deposits

From here, you can utilise short-term volatility in your growth portfolio to your advantage. This involves selling down portions of your long-term portfolio during peak periods to replenish your conservative pool. This will allow you more and more time to live off your conservative pool, thus delaying when you will access your growth pool in earnest. This, in turn, means more long-term wealth appreciation for the majority of your portfolio.

This approach is simple, yet very difficult to implement. It is hard to stick to without guidance and discipline. However, this discipline is difficult to have with your own wealth, due to attached emotion and the influence of the media. This is why trusted financial advice can add so much value to your wealth over time, as it is unemotional and objective. We stick to enduring principals and never fall victim to fretting over above two truths.

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