Register For Our Mailing List

Register to receive our free weekly newsletter including editorials.

Home / 125

Three rules to invest by

There are three investment rules by which to live in the current volatile environment – the same three rules we think by which investors should always live.

Very simply, they are:

  • Diversify sensibly but not gratuitously
  • Be opportunistic only at the margin
  • Stick to the plan and give your strategy the time it needs to work (this infers the actual existence of a plan. Surprisingly, not everyone has one!).

Most people do not want markets to fall. However, declines can be a useful experience for investors because they provide a real-world test of your investment strategy, your expectations and fortitude. When people invest in equities, for example, they often expect them to go up 10% a year or some similar figure. However, what is often conveniently forgotten is that even if they do that on average, they rarely do it year in and year out. What falling markets provide is the valuable experience all investors need to have when investing; particularly in ‘growth’ assets.

Develop your own plan and stick to it

This is why you need to stick to the plan. Typically 90% of the movement in the value of a standard 70/30* balanced fund comes from one asset class: equities.  Now as you become more defensive, so your ‘factor risk concentration’ (or sensitivity) to volatile assets diminishes. This is why conservative funds are less volatile than growth funds, but it is also why their expected return is lower. Swings and roundabouts. The amount of diversification you employ should be consistent with your tolerance for risk and appetite for return.  ‘Over-diversifying’ may save you in the short run, but will cost you when you retire.?

In volatile times such as these, there is a natural, human temptation to just do something. Our view is that if your investment strategy was correctly matched to your risk tolerance to begin with then market gyrations (down and up) should just be part of your long-term investment journey. So does that mean that we don’t advocate short term adjustments to the strategic asset allocation? Not quite. If you believe you (or your investment manager) have skill in short-term investing, by all means give it a go … but only at the margin, i.e. in small size.

Our tactical asset allocation process has been proven to add returns for minimal risk over 3+ years at a time but its risk budget is small. It relies on being right on average on many small investments held over the long term, rather than taking a few large bets over short periods, as is often the temptation. Savvy investors can still take advantage of opportunities when they arise, but they should still rely on the main game plan to deliver the vast majority of their investment outcomes.

Difficult to buy when others are selling

It may be instructive to consider the effects of prior sharp selloffs. Driven by specific events, fear can feed on fear to produce an oversold situation. For example, the so-called ‘taper tantrum’ of 2013 took the Australian market from above 5,100 to 4,600. As it turns out, it was the start of a significant market rally. But who’s willing to take a punt on this market correction?

Use the past and the present to clarify your future expectations by all means, but stick to your plan. Let’s say you have decided to take 5% of your portfolio to chase tactical opportunities. Plan ahead so that you know what your reaction will be should it go against you. Therefore, before making the tactical trade, ask yourself the question: “What loss can I take before I have to pull up stumps?” and write it down. As required, reconstruct your portfolio on the basis of your findings.

*70/30 refers to a multi-asset balanced fund with 70% growth assets and 30% defensive assets. Defensive assets are generally fixed interest securities and cash. Growth assets are everything else.

 

Martyn Wild is Head of Diversified Strategies at BT Investment Management. This article is for general education and does not consider the circumstances of any person. Investors should take professional advice before acting on any information.

 

RELATED ARTICLES

ASX200 'handbrake' means passive investors could miss out

The problem with concentrated funds

What poker can teach us about investing

banner

Most viewed in recent weeks

Australian house prices close in on world record

Sydney is set to become the world’s most expensive city for housing over the next 12 months, a new report shows. Our other major cities aren’t far behind unless there are major changes to improve housing affordability.

The case for the $3 million super tax

The Government's proposed tax has copped a lot of flack though I think it's a reasonable approach to improve the long-term sustainability of superannuation and the retirement income system. Here’s why.

7 examples of how the new super tax will be calculated

You've no doubt heard about Division 296. These case studies show what people at various levels above the $3 million threshold might need to pay the ATO, with examples ranging from under $500 to more than $35,000.

The revolt against Baby Boomer wealth

The $3m super tax could be put down to the Government needing money and the wealthy being easy targets. It’s deeper than that though and this looks at the factors behind the policy and why more taxes on the wealthy are coming.

Meg on SMSFs: Withdrawing assets ahead of the $3m super tax

The super tax has caused an almighty scuffle, but for SMSFs impacted by the proposed tax, a big question remains: what should they do now? Here are ideas for those wanting to withdraw money from their SMSF.

The super tax and the defined benefits scandal

Australia's superannuation inequities date back to poor decisions made by Parliament two decades ago. If super for the wealthy needs resetting, so too does the defined benefits schemes for our public servants.

Latest Updates

Planning

Will young Australians be better off than their parents?

For much of Australia’s history, each new generation has been better off than the last: better jobs and incomes as well as improved living standards. A new report assesses whether this time may be different.

Superannuation

The rubbery numbers behind super tax concessions

In selling the super tax, Labor has repeated Treasury claims of there being $50 billion in super tax concessions annually, mostly flowing to high-income earners. This figure is vastly overstated.

Investment strategies

A steady road to getting rich

The latest lists of Australia’s wealthiest individuals show that while overall wealth has continued to rise, gains by individuals haven't been uniform. Many might have been better off adopting a simpler investment strategy.

Economy

Would a corporate tax cut boost productivity in Australia?

As inflation eases, the Albanese government is switching its focus to lifting Australia’s sluggish productivity. Can corporate tax cuts reboot growth - or are we chasing a theory that doesn’t quite work here?

Are V-shaped market recoveries becoming more frequent?

April’s sharp rebound may feel familiar, but are V-shaped recoveries really more common in the post-COVID world? A look at market history suggests otherwise and hints that a common bias might be skewing perceptions.

Investment strategies

Asset allocation in a world of riskier developed markets

Old distinctions between developed and emerging market bonds no longer hold true. At a time where true diversification matters more than ever, this has big ramifications for the way that portfolios should be constructed.

Investment strategies

Top 5 investment reads

As the July school holiday break nears, here are some investment classics to put onto your reading list. The books offer lessons in investment strategy, financial disasters, and mergers and acquisitions.

Sponsors

Alliances

© 2025 Morningstar, Inc. All rights reserved.

Disclaimer
The data, research and opinions provided here are for information purposes; are not an offer to buy or sell a security; and are not warranted to be correct, complete or accurate. Morningstar, its affiliates, and third-party content providers are not responsible for any investment decisions, damages or losses resulting from, or related to, the data and analyses or their use. To the extent any content is general advice, it has been prepared for clients of Morningstar Australasia Pty Ltd (ABN: 95 090 665 544, AFSL: 240892), without reference to your financial objectives, situation or needs. For more information refer to our Financial Services Guide. You should consider the advice in light of these matters and if applicable, the relevant Product Disclosure Statement before making any decision to invest. Past performance does not necessarily indicate a financial product’s future performance. To obtain advice tailored to your situation, contact a professional financial adviser. Articles are current as at date of publication.
This website contains information and opinions provided by third parties. Inclusion of this information does not necessarily represent Morningstar’s positions, strategies or opinions and should not be considered an endorsement by Morningstar.