Keep your head while all around you are panicking. History shows that those taking a long-term view of investment get better returns than those who just follow the mob.
It has been a white-knuckle rollercoaster ride for share market investors since the start of 2016, but financial experts recommend you just hold on for the ride rather than do anything rash. That’s because, despite the latest volatility on the Australian share market and the promise of more to come over the short term, it’s the longer term that really counts.
Data from investment research firm Morningstar shows that even those who invested during the Global Financial Crisis, at the very lowest point of the share market in early 2009, have achieved good returns over the past seven years. A $10,000 investment into the Australian market in March 2009, when it was trading 1500 points below current levels, would have more than doubled by now based on an average annual return since then of 11.82 per cent. Anyone who decided to get out of the share market altogether at that time and switch entirely into cash would be significantly worse off, with an average annual return of just over 5 per cent.
It is important to take a long-term perspective on investing, so the latest bout of volatility should not be a cause for undue alarm for serious investors. Over the past 10 years the best-performing asset classes have been the share market and commercial property, followed by fixed interest and cash. It is important to have exposure to the various asset classes to have a spread of risk but to how much depends on your circumstances and your perspective. It is a negative environment at the moment, but investors shouldn’t focus just on this.
Look before you Leap
If you are tempted to cash out, make sure you compare the likely return to that from your share portfolio. The residential property market has gone cold and already low savings rates are exposed to the possibility of another RBA rate cut. Banks are still offering a dividend yield of about 10 per cent!
Go Long Term
Remember you’re investing for the longer term and trying to make money on short-term movements is best left to the professionals. When individual investors see the so-called big end of town doing what it’s doing, there’s always a tendency to believe that someone knows
Be Selective
Look for value and a strong track record of revenue and profit growth. For example, the big four banks represent good value after falling 18-30 per cent since March 2015 and the resources sector again likely to be on the verge of some recovery.
Forget the Headlines
An underperforming economic growth rate in China might not be great news but that doesn’t mean the end of the world. The reality is the size of the Chinese is much larger than it was 10 years ago. So there is still a massive amount of activity. There are plenty of companies out there doing good business despite negative headlines. While the share price might jump up and down, Woolworths are serving more customers than a year ago which has nothing to do with the Chinese markets being jittery, and QBE isn’t selling fewer insurance policies and BHP isn’t mining less iron ore. It seems a lot of this is purely having a rational perspective!
More good than Bad
While stocks have declined, they haven’t fallen anywhere near as sharply as during the GFC, when the ASX 200 dropped more than 50 per cent from its October 2007 high of 6851 to about 3145 in March 2009. The GFC had a profound impact on companies and that balance sheets are considerably deleveraged compared to eight years ago. We’re going to have some volatility and some ups and downs but we don’t think stocks are going to fall off a cliff.