The sharp falls and rises on global equity markets have left many investors wondering whether they would be better off having their funds out of the equity markets altogether.
The reality is that markets and returns will always rise and fall. With this in mind it is important to take a long-term approach to your investment portfolio. A well balanced and diversified portfolio is also critical in achieving consistent returns over the long term.
Basically, there are three main investment styles within the funds management industry. These investment styles are commonly known as Growth, Value and Core.
Growth investing aims to buy shares which potentially have superior earnings growth. The manager concentrates on buying shares in companies that are growing at a rate faster than the economy as a whole. The growth style emphasises qualitative criteria including value judgements about the company, its markets, its management and its ability to extract future earnings growth from the particular industry.
The potential downside is that if a company goes into sudden decline and the share price falls, the shareholding can lose capital value rapidly.
Value investing, on the other hand, aims to buy shares which are undervalued. Value investing concentrates on buying shares in companies that are fundamentally sound and stable, but whose shares are at a bargain price because the markets confidence in the company is in temporary decline.
The key to value investing is to avoid shares that are merely cheap because the company is failing, and to look for bargain shares - prices that are low for temporary and/or irrational reasons.
A potential risk in value investing is that the company may not turn around, in which case the share price may stay static or fall.
Core investing has neither a growth nor value bias over the medium to long term. Adding a core manager to your investment mix can reduce the volatility impact of economic and market cycles.
Index funds tend to use core investment styles as they are buying into all the underlying shares within a particular market index. Growth or value stocks within the index will perform differently in different market cycles, so a core fund will span all of those stocks to achieve a more balanced return.
If you have a main component of your portfolio in a core fund, some in growth and some in value, it doesnt matter what investment and market cycles are doing and you are likely to achieve a more consistent return.
Your financial adviser can provide quality advice to help you select the right investment for your needs