Since June of 2015 we have seen declines in equity markets one day and recovery the next.These movements have been sharply down and up over this time frame otherwise referred to as volatility. The reality is that this is nothing new and equity markets will go through periods of volatility for a variety of reasons.
If we look beyond the dramatic headlines, designed predominately to sell newspapers I believe there are some essential realities that are worth reminding ourselves of.
Volatility has and always will occur and as a consequence, as investors we need to be prepared for this eventuality. In this way we are prepared when volatility occurs and can take an unemotional view, remaining focused on long term objectives.
Corrections occur and when they do, can often provide a good time to invest where the value of stocks become well priced and attractive buying opportunities. History shows that some of the worst short term market losses were followed by stock market recovery beyond the original market high point.
Attempting to sell one day, remain in cash and invest the following week has the potential to damage a portfolio. Analysis has shown (noted below) that missing the 5 best performing days in the market can significantly reduce investor returns.
It is not possible to precisely determine the outlook of individual asset classes over a future time period with precision and the best performing asset class can rotate from one to the next quite rapidly. Accordingly we advocate that it is important to maintain a diverse asset allocation across all asset classes consistent with your risk profile. Diversity will help you to manage risk by not “having all your eggs in the one basket”. Equally it is important to have sufficient orientation within your portfolio allocated to Defensive assets (like cash and fixed interest securities) and Growth assets (domestic and international equities), which will be determined based on an individual’s circumstances and attitude to risk.
It is important that we not allow sentiment and emotion, both in the form of euphoria and also pessimism dictate our investment strategies when markets become volatile. In the words of Warren Buffet, “The stock market is a mechanism for transferring wealth from the impatient to the patient” and this is typically the case when market volatility occurs causing investors to make knee jerk reactions. It is times like these that a written financial plan tailored to your circumstances is essential to ensure you remain focused on your long term objectives irrespective of the market noise.
Alexander(Xan) Kitchin CPA, BBus(Acc), BEcon
Director | Authorised Representative
Important Information: The information in this document is of a general nature only. Before you make an investment decision you should assess for yourself or obtain professional advice on whether the information is appropriate for your particular investment objectives, financial situation and particular needs.