As you kick your fresh financial strategy into gear this year, it is important to…
Volatile markets are here to stay, but the principle of investing and staying the course has never held more weight when looking at 2020 in reflection.
Stay The Course
When COVID-19 was announced, there was an air of fear and uncertainty, and it was very difficult to see the light at the end of the tunnel. Yet, with every downturn in history, there has always been a recovery period that has paved the way to much better days in the share market. We are beginning to see the share market recover, as Governments adjust and the new vaccine begins to roll out.
Remember Long Term Market Trends
We were reminded at the beginning of 2020 that the share market works in response to human emotion and as a result, can fluctuate dramatically. However, no-one was prepared for the instability that 2020 brought upon us. COVID-19 was and is an event like we’ve not seen in our lifetime. It is however following the market trend that we have definitely seen before. This table highlights the impact that some of the largest epidemics in our recent history have had on our markets. You will notice that the trend is an initial drop due to
panic, followed by a steady increase in value over the next course of months.
*MSCI World Index
We can look at The Australian Securities Exchange (ASX) as an example, which is the primary exchange for Australian stocks and uses the ASX 200 index . From the 20th of February 2020, the ASX 200 index was at 7162.5. Following the huge fall due to COVID-19, which was 23 March last year, the ASX 200 plummeted to 4,546. That was a total fall of approximately 36.69%. You can imagine that this would be the time when everybody panicked. Here’s the thing though, remembering long term market trends, if those people had stayed the course, they would now be enjoying the market’s recovery. Beginning at 23rd of March 2020 until the 25th January 2021, the ASX 200 has returned 50.13%. The 1 year return from the 25th January 2020 to the 25th January 2021 is – 2.62%. Was it worth panicking and selling? Probably not; However no-one can see into the future and it is very difficult to take emotion out of the equation, because investing in the market involves your hard earned cash.
12 Months On – What Would Have Happened If You Panicked
As it has been said before, it isn’t about timing the market, but time in the market. It is impossible to time a recovery in the share market and trying to do so will just cause you more harm than good. When shares begin to plummet, nobody knows when they will actually ‘bottom out’, but 100 years of bull and bear markets tell us that they will eventually hit their bottom, and what comes next is the recovery. The danger is your own fear and panic. If you opt to sell while shares plummet, it will be very difficult to jump back in to enjoy that inevitable recovery. By the time you do jump back in, there is a good chance you would have missed out on the biggest gains. It is so important that you meet with your financial adviser to help acknowledge your risk tolerance and your strategy when you begin your investment journey, so that when peril comes, you can be reminded that you have a solid plan in place.
Below is a table which shows the returns of Vanguard High Growth versus Vanguard Conservative over the past 12 months since COVID. This highlights the difference of returns if you reacted to the dramatic drop in the market and moved from a high growth to a conservative more cash based fund your returns a year on would be significantly lower. As you can see the 1 Year result for High Growth is 10.21% versus 2.83% for the conservative fund. If you had panicked and withdrew funds at the low, you would have realised the loss and not been in a great position to capitalise on the recovery.
Be Invested For The Long Term
Investing in the share market takes courage and discipline, not to mention advice from a financial adviser. You will need to be prepared to see some losses in the short term (usually reflecting current national or global events) and see your investment as a long term commitment that will show growth over a period of time. It is far easier to lose money by trying to avoid corrections or crashes in the market, than it is by staying in the market during these changes. It is valuable however, to speak to your financial advisor during these times of change, to ensure you are on the right track with your investments and to obtain some reassurance that the market will recover in the way it has before throughout history. Chatting to your advisor may help remind you that you had a plan and you should stick it out. If you have created a solid financial plan with your advisor, then it is worth sticking to, through thick and thin. Taking emotion out of the equation when looking at your paper losses is a necessity, unless you are willing to pull the plug and experience some real losses.
For more information get in contact with Elliot Watson Financial Planning on 02 4038 1623.
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