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This commentary is written by Vanguard Principal, Corporate Affairs & Market Development Robin Bowerman. The title is How should I invest in volatile markets?

It was first published on Wednesday 1 February 2012

And is read by Michael Mullins

Please remember that advice in this podcast represents a general view. It is recommended that you seek specific financial advice, before making investment decisions.

This is a question that many investors are, not surprisingly, asking themselves.

But what might surprise some investors is that the answer is not as elusive as it may at first seem.

Highly volatile markets can provide a valuable reminder about the need to get back to the basics of sound investment practice. Indeed, such a reminder or wakeup call can be very much in an investor’s interests.

The basics of sound investment practice include understanding your personal tolerance to risk, not allowing emotion to dictate your investment decisions, and setting an appropriate long-term or strategic asset allocation.

And the regular rebalancing a portfolio back to its strategic asset allocation – if still appropriate – is part of taking a disciplined approach to investment. Without periodic rebalancing, a carefully constructed investment portfolio can be thrown right off course.

Another investment basic is to understand the risk of trying to time the market. The reality is that even investment professionals rarely succeed in consistently picking the best times to buy or sell shares.

Rather than trying to time the market, many investors adopt a simple strategy known as dollar cost averaging. It involves investing a set amount into the market at regular intervals. This means more shares are bought when prices are low and fewer when prices are high.

Finally, investors have a strong incentive to minimise their investment costs. High investment charges become particularly noticeable to investors when returns are subdued or negative. And the act of keeping a close watch on investment management fees, transaction costs, and taxation is clearly within an investor’s control.

During the coming year, Smart Investing will examine in more detail ways for investors to look after their portfolios in volatile markets including what to consider before fleeing to an all-cash portfolio.

And that concludes the column

How should I invest in volatile markets?

from Robin Bowerman,  Principal, Corporate Affairs & Market Development at index fund manager Vanguard Investments Australia

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Please remember that advice in this podcast represents a general view. It is recommended that you seek specific financial advice, before making investment decisions.