The sourdough approach to investing
It is no secret that making sourdough has fast become a national pastime as we all seek new hobbies to get us through the COVID-19 lockdown. Likewise, there is a strong affinity with the sourdough approach to investing linked to a personal wealth creation strategy.
The pandemic has introduced often unwelcome changes to our everyday lives, but perhaps one of the few silver linings to emerge from this cloud of social restrictions is that it has forced many of us to slow down and be patient.
Coincidentally, these two conditions are crucial both for the perfect loaf, and for successful long-term investing.
Now is the time to start
There are many factors that contribute to successful investing but arguably starting is the most important.
While many of us understand the power of compound returns and the benefits of investing early, we often get hung up on when best to enter the market and how much we should invest.
But just as with sourdough, you can begin the process any time and with very few ingredients.
For those less familiar or have settled on different lockdown activities, a starter is a fermented combination of flour and water and acts as a leavening agent that gives sourdough bread its rise.
This small initial combination of just two ingredients provides the foundation of every loaf, and when regularly fed with more water and flour, remains active and can generate more loaves over time.
Similarly, a small initial investment with regular contributions forms the foundation of an investment portfolio that can also generate returns over time. ASX’s 2020 Investor Study shows that many Australians are heeding this principle, with 41 percent of investors holding a portfolio under $100k and a rising number of non-investors realising that there is no need for large amounts of capital to enter the market.
It is also a salutary reminder that constantly delaying investments to better time the markets is more a gamble than a winning strategy. As ASIC pointed out, predicting short-term market movements is challenging for even the most skilled of investors, and even less probable for the average retail investor.
Stay disciplined through the rise and falls
Perhaps one of the most satisfying aspects of making bread is seeing the dough rise. The same can be said for investing.
When our portfolios are up and we see gains, we feel triumphant. When they dip into the red, we get anxious.
But volatility in markets should be expected and the subsequent day-to-day changes in our portfolio value should not be reason to switch in and out of investments.
Adopting a long-term perspective, sticking to your investment plan and remaining patient is crucial to successful investing. Monitoring the value of your portfolio hourly will not yield favourable results, just like how monitoring your sourdough too frequently in its rising phase will not make it grow any quicker.
Vanguard’s 2020 index chart also shows the importance of staying the course, even through the many financial crises that have occurred in the last 30 years. According to the chart, since 1990 an initial $10,000 investment in the broad Australian share market would have yielded 8.9 per cent and grown to $130,457.
Reset and rebalance if required
That being said, if over time you feel like your portfolio does not fulfil the return requirements of your initial investment goal, or your risk tolerance or market conditions have shifted – which we should expect over time – then it may be time to consider reviewing your portfolio’s asset allocation.
While the success of a sourdough loaf depends on many factors, one of the most important is to get the amount of each ingredient right. How much starter, water, flour and salt you add to the mix is vital to the end result. If over time you find yourself relaxing on the measurements, you may find the quality of your loaf will vary.
Similarly, how much of your portfolio you allocate to each asset explains the majority of your return variability. By periodically rebalancing your portfolio so it aligns again with your target asset allocation, you can ensure sufficiently diversified and ultimately on track to reach your investment goals.
If after reading the above you have questions, or need help, then call MB+M on 03 5821 9177 and talk with one of the experienced Certified Advisors from our Wealth Creation team. We are committed to help you achieve the retirement outcome you desire and making your life easier…..
Written by Robin Bowerman, Head of Corporate Affairs at Vanguard.
This publication has been compiled by OzPlan Financial Services, ABN 35 005 391 202 AFSL 221235 and is current as at time of preparation, April 2020
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