The last week has seen some dramatic falls across the world’s stock markets. At times like these it’s no surprise many investors become concerned – particularly about the impact on their superannuation and other investments.
On this particular occasion, we’ve seen global market (particularly the US market) enjoy one of the longest bull runs (upwards) ever and many have been warning for some time that a market “correction” was due. Maybe we saw the start of this correction last week, but it’s at times like these that we need to remind ourselves that market volatility is just part of the investment game and is often tolerable provided we understand it and minimise the risks.
Let’s revisit the reasons behind market volatility and how we should respond (hint: do nothing!).
Why do markets move so much?
Markets are influenced by many things – industrial, economic, political and social factors can all have an impact. For example, consumer and business confidence affect spending and therefore company profits. Global trade and production naturally affect economic growth.
Poor political and fiscal decisions in some countries may lead to a flow-on effect in other countries who are owed money. And of course, natural disasters can cause major damage to any economy with no warning. During times of market volatility, it’s important to remember one of the fundamental principles of investing – markets move in cycles.
What is the effect of market volatility on super funds or investments?
In times of market volatility your super or investment balance may decline, depending on your exposure to the markets, but it is important to remember that markets move in cycles and so if we ride through the dips it is likely our balance will bounce back up in due course.
The Australian Securities & Investments Commission (ASIC) has stated that, ‘negative returns from time to time are not inconsistent with successful long-term investment’. History demonstrates that over the long term, the general trend of share markets has been upward.
Don’t lose sight of the bigger picture
In the case of Super, it is a long-term investment. Shares, which usually form a large part of most balanced super accounts, are also generally a long-term investment (unless you’re into picking short term winners – read: gambling). They are designed to provide capital growth over a period of five years or more. Think in years, not days.
The time frame for super may be 20 years or more, so short term volatility shouldn’t diminish the long-term potential of your investments. Growth assets (such as shares) tend to fluctuate in the short-term, but have historically provided excellent returns for investors over the long-term.
When sharemarkets fall in value, it may be tempting to sell up. However, trying to time the market by selling now and buying back later is a risky strategy that rarely results in investors coming out ahead. By taking a long-term view of investing, you can ride out any short-term fluctuations in the market and take advantage of growth opportunities over the long-term.
One way to manage market volatility is through diversifying your portfolios. It can help deliver smoother, more consistent results over time. Your investment may benefit by being spread across a variety of asset classes, including shares (domestic and global), fixed income, cash, direct and listed property and alternatives.
This diversification should help soften the effects of any share market falls as some asset classes often tend to do well whilst others are struggling. Also, spreading your assets around means you are less reliant on any one asset class at any particular time. It does of course work both ways, so whilst diversification can soften the fall it also dampens the rise.
Understand your risk profile
When we provide our clients with advice, we spend a lot of time talking about risk. All investments carry some risk. How much risk you’re willing to accept will be influenced by your financial situation, family considerations, time horizon and even your personality. If market volatility has caused you to reassess the way you feel about risk, it’s important that you speak to us to discuss any necessary changes to your financial plan.
Understanding the implications of withdrawing
If you are tempted to withdraw you investments, you need to understand all the implications, risks and costs involved, before taking any action.
- Crystallising losses – If the value of your investment is falling, you are technically only making a loss on paper. A rise in prices could soon return your investment to profit without you doing anything. Selling your investment makes any losses real and irreversible.
- Incurring capital gains tax (CGT) – Always make sure you know what your CGT position will be before selling any asset.
- Losing the benefits of compounding – If you’re thinking about making a partial withdrawal from an investment, remember that it’s not just the withdrawal you lose, but all future earnings and interest on that amount.
Keep in mind that:
- Super is a long-term investment designed to generate sufficient money so you can enjoy your retirement.
- Diversification is an important part of a long-term super investment strategy. To create the lifestyle you want in retirement, it may be necessary to invest in growth assets like shares so that your returns stay ahead of tax and inflation.
- It may be beneficial to ride out the bad times in order to achieve long-term growth.
- Your financial plan was designed exclusively for you to suit your investment objectives and risk profile. Play to long game and stay focused on your long-term goals, and avoid the distraction of short term volatility.
Want to find out more?
If you’d like to understand more about market volatility, contact us today and we can make a time to discuss this in more detail.
The information in this article is general advice only and does not consider personal situation, needs, or objectives. Please seek personal advice before acting on any of the content in this article.