Simple steps can smooth your returns.
As recently as early July, the FTSE 100 stood comfortably above 6,000. Happy days were here, we thought.
But by early August, London's premier index was flirting with 5,000 -- and on several occasions dipped below that level in intra-day trading, most recently as early October. On 4 October, it closed at 4,944.
All of which goes to show that we shouldn't take today's level of 5,400 or so for granted. From here, the index could go anywhere -- and with it, pension savings, incomes, and the built-up wealth of countless investors.
In short, volatile conditions look likely to be a feature of the investing climate over the short-to-medium term.
Whatever our politicians might hope for, the eurozone's problems, high national debts, and tepid economic recovery aren't going to go away any time soon.
So what's an investor to do? Sadly, history already tells us what many investors are doing: cutting and running, deciding that the stock market isn't for them, and taking their losses on the chin.
Fortunately, there are better options.
First, spread your wealth -- and your risks. A portfolio spread across asset classes will always be more resilient to adversity than a portfolio concentrated on just one asset class.
That's why investors are urged to spread their portfolios between shares, bonds and gilts, and cash. When the stock market is racing away, gilts and cash may not seem exciting. But when it's plunging, they offer steady returns and reassurance.
Take a look at a table produced by fund management firm Fidelity, showing the returns that asset classes enjoyed during various economic conditions over the period 1973-2010. Each class enjoyed booms, to be sure -- but also busts.
Effective diversification improves portfolio efficiency, says Fidelity, by helping to ensure that for any given level of risk, investors maximise their returns.
What's more, it adds, multi-asset funds have the potential to boost returns further through tactical asset allocation -- where weightings are tweaked according to prevailing economic conditions.
And you don't have to put your money in a fund to achieve that, although many investors do, of course.
A judiciously-acquired mix of shares, bond-and-gilt ETFs and cash would do much the same trick, too -- and arguably at lower cost.
Hold for the long term
Here at The Motley Fool, we're generally buy-and-hold investors.
That's because investment churn saps performance through trading costs. It's generally better, goes the logic, to take your time over the selection of a stock, pick decent businesses run by skilled managers, and let them get on with the job of building your wealth.
It's certainly a strategy that has worked well for Warren Buffett, of course. "When we own portions of outstanding businesses with outstanding managements, our favourite holding period is forever," he told investors in his 1988 letter to shareholders.
Fast approaching sixty, I'm old enough to remember all sorts of stock market crashes and periods of under-performance -- the causes and durations of which are long since lost in the mists of time.
What I do know is that markets eventually recover, and carry on heading upwards -- carrying our stocks, and investment wealth, with them.
Always a popular pick, high-yielding FTSE 100 behemoths have the size to resist adversity, while continuing to throw off cash year after year.
Quite simply, defensive consumer-centric stocks such as Diageo (LSE: DGE), British American Tobacco (LSE: BATS), Tesco (LSE: TSCO), and Unilever (LSE: ULVR) have been weathering adversity for years, rewarding shareholders with dividends all that time.
And those dividends play a useful role in countering market volatility, argues Fidelity's Dominic Rossi. For while many investors are still deeply rooted in the concept of investing for straightforward capital growth in equities, the investment landscape has changed, he reckons.
In a lower growth and interest rate environment for developed economies, he points out, it now makes sense to look at equities from a total return perspective: capital growth and accumulated income over time, too.
In short, remember the importance of compounding and dividend reinvestment: over time, compounding even seemingly paltry dividend payments can contribute significantly to total returns.
And the good news is that while markets today are just as volatile and unpredictable as they've been at similar points in the past, investors today have a huge advantage over their predecessors.
Simply put, in times past the cost of taking some of these preventative measures was simply prohibitive. Funds were expensive; brokers' dealing costs astronomical, and low-cost ETFs and index funds didn't exist. Nor did low-cost ISAs and SIPPs.
Today, the world of investment has been transformed. Markets may fluctuate erratically -- but that doesn't mean that your portfolio, and the investment returns from it, must also follow suit.
More on the markets:
> Malcolm owns shares in Tesco. The Motley Fool owns shares in Tesco and Unilever.
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