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Response to Market Volatility

27 Aug 2015 2:06 PM -

We are currently witnessing increased volatility in financial markets. Market declines spook people and many think the worst. Financial media quickly switches into alert mode by showing special segments and pumping out more reports, while anyone pushing a newsletter proclaiming the end is near jumps in to proclaim “this is the moment!”

Despite all the extra attention and analysis, there’s little sense to be made from what you’ll see, read or hear because most of it is hot air and not worth your consideration.

When these confronting market movements are in your face there’s nowhere to hide from the attention they’ll get, yet financial markets will soon be ignored again, until the next blow up occurs.

To understand the scope of attention a market decline will get, consider this: the media never dedicates a front page and pages 4 and 5 to the sharemarket when it goes up 3-4% - only when it’s down. The sharemarket never leads the nightly news when it’s had a great day – only when it’s had a terrible day.

It’s also worth widening your view to include recent years. These market behaviours aren’t anything new. In the five years across 2010-2014 there were nine corrections of 5% or more and another that was 15%. The last whopper was in 2011, that was over 20% and as a result of the US debt ceiling crisis.

So there have been eleven corrections since 2010, excluding the goings on of this year. Each time someone has proclaimed it to be the beginning of the end, but life went on and markets continued to trade up, down and sideways – as they always do.

Some key things to always remember.

Financial markets aren’t a scare free ride. We expect higher returns from shares because of the exact volatility we’re seeing. Share markets move fast in both directions and to capture the upside you’ll inevitably capture some of the down.

Market timing is no solution. It would be fantastic to eliminate the downsides and only ride the markets upward, but no one has ever consistently been able to do this. Take those eleven corrections we mentioned, no one predicted their beginning and no one predicted their end. The smart investors don’t pretend they know what will happen next.

As an example here’s a chart of last year’s correction with media headlines superimposed. Notice the tip that money would continue to flood into shares just as the market started to fall and then the call to grab your parachute and jump just as the market bottomed! This is the exact reason the media is a poor investment adviser.

 

Diversification is imperative. A mix of different assets comprising the defensive (bonds & cash) and the more volatile (shares and listed real estate), spread across the world, will inevitably provide a more stable portfolio than one wholly ignoring the defensive/global aspect. Different asset classes often act in different ways and offset moves of the other. As an example bonds have been positive recently as shares have performed poorly, while listed real estate has remained somewhat stable.

The important thing in times like this is to stay calm. Sure there has been pain, but part of investing is learning to handle that pain. As we’ve shown by the number of corrections over the past 5 years this isn’t a new phenomenon, but as history has shown, over the longer term we should be rewarded for our patience and discipline.

This represents general information only. Before making any financial or investment decisions, we recommend you consult a financial planner to take into account your personal investment objectives, financial situation and individual needs

It’s never too early to invest in your future