The lure of trying to time the market may tempt even long-term investors. But outguessing markets isn’t as straightforward as it sounds.
Political debate regarding the refunding of franking credits for those that don’t pay tax is starting to heat up. I must have been asked by a dozen people what the hubbub is all about.
“Can you explain simply dividend imputation, franking credits and double taxation”
It is a little complicated and I reckon the best way to explain is by example. Let me know if this makes sense.
Once a decision has been made to buy an investment, it is important to consider the best investment structure to use. An investment structure refers to the way investments are legally owned. Many people simply purchase assets in their own name or joint names, when other ownership structures may be more suitable.
Market volatility can create anxious moments for even the most disciplined of long-term investors. But people who make it through to their goals are usually the ones who can separate the feeling itself from the urge to act upon it.
Understanding how markets work can make it easier to deal with volatile periods. Here is a layman’s explanation.
If we acted logically, would we ever eat food that’s not good for us? No. Would we ever skip our exercise? No. Would we drink and drive? No. None of these are logical, but it still doesn't stop us.
Emotion gets involved.
It turns out that Isaac Newton was a better physicist than he was an investor. Newton lost a fortune-around £20,000-in one of history’s most notorious market collapses, the South Sea bubble, when the South Sea company collapsed in 1720 (that’s the equivalent of about £7,500,000 in today’s money. Ouch!)
Do you want to know a secret? Building long-term wealth through investment doesn’t have to be complicated. And it doesn’t depend on making forecasts. The simple fact is that market returns are there for the taking, so long as you stay disciplined and build a diversified strategy around risks that carry a reliable reward.
The media would have you believe that a successful investment experience comes from picking stocks, timing your entry and exit points, making accurate predictions and outguessing the market.
Is there a better way?
“A million bucks won’t get you much these days”.
I was taken aback by the comment.
We tend to use that number to decide who is rich and who isn't. “Oh, he’s a millionaire, he can afford it”.
A great takeaway from one of my favourite money books, The Most Important Thing by Howard Marks is about understanding cycles.
Here is how he explains it: