Australian investors should use this period of volatility in equity markets to ensure their portfolios are reflecting their financial goals.
In this topsy-turvy market investors can become too preoccupied with daily market movements and lose sight of their bigger investing picture.
Investors need look at the composition and weighting of their portfolio, and whether it can achieve their goals over a period of time.
A home deposit, for example, might be a three-year investment plan, so the portfolio needs to be reasonably conservative. If the goal however has a five to ten-year horizon, the portfolio would require a more balanced approach, such as having at least 50% in shares and 50% in secure investments.
Beyond that timeframe, a more aggressive investment strategy can be utilised; at least 70% in shares would be an appropriate balance as there’s more time to recover from any corrections in the market.
Investors should review the historical performance of each investment asset class over time in better understanding the impact of volatility. This can provide a degree of comfort to younger or less experienced investors who haven’t lived through the natural fluctuations of market cycles.
More experienced investors accept volatility and recognise it’s the price you pay for higher returns. Clients that went through the global financial crisis of 2008/09 dealt with the pandemic volatility well, whereas less experienced investors struggled with the extreme movements.
There’s a lot of historical data available on shares, property and bond market returns over time. The S&P500 Index, for example, had 84 periods of decline between 1946 and 2022 of between five and ten per cent, which is more than one a year; however, on average, it only took one month to recover the loss. In addition, 10-20% declines occurred 29 times – or nearly once every two years – but again, it only took an average of four months to recover.
Other tips for investors in mitigating the impact of volatility include having a written investment strategy which includes asset allocation ranges with minimum and maximum levels. Investors without a documented strategy are more likely to panic and revert to cash when a major market correction occurs. Interestingly, they then tend not to go back to the original investment allocation until markets have rebounded 20%, locking on losses or destroying any capital.
Selling shares because of volatility isn’t a sound investment strategy and is instead a means of losing money. There are plenty of reasons to sell a share, but volatility and market falls of ten per cent isn’t one of them. You will miss the best trading days which tend to happen right after the big falls.
Jonathan Philpot is a director of HLB Mann Judd Wealth Management (NSW) Pty Ltd (AFSL 526052) ABN 65 106 772 696
Information based on historical performance is often not a reliable indicator of future performance. You should not rely solely on this material to make investment decisions.
First published in Personal Wealth Adviser, Issue 3.