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Once you have ordinary intelligence, what you need is the temperament to control the urges that get other people into trouble in investing.
Last week share markets around the world fell. At its lowest point the Dow Jones Industrial Average was down 1579 points, a fall of 6.4 per cent. This one-day fall wiped off more than all the gains made since the beginning of 2018. The Australian share market, unsurprisingly, followed suit having its worst week in 2 years. If market headlines are to be believed, this drop was a reaction to the announcement of stronger than expected employment figures released in the US, leading to investors fearing the US Federal Reserve would raise interest rates faster and higher than predicted. Raising interest rates typically has a negative outcome for shares as investors worry about the outlook for the economy and company earnings, cautiously preferring cash and or bonds.
Dramatic? Let’s Put It In Perspective
2017 was not an ordinary year. There has been abnormally low volatility. The S&P 500 (US Share indices) returned 19.42 per cent and had been within 3 per cent of an all-time high. Below is a chart showing the last 5 years of S&P 500. The drop last week is circled. It is a small blip when viewed over the longer-term. Periods of market calm are bound to end at some point – it is the ‘when’ that is hard to predict. One must remember that the jobs figures showed the highest wage growth in eight years, not the weakest. So ironically, something that is usually seen as a positive has been the catalyst for investor panic.
5 Year Chart of S&P 500 (Not Including Income)
Morningstar’s Clint Abraham says “we appreciate that many are nervous about the current market conditions, yet it is important that we stick to our plan and focus intently on the objective at hand.
“We similarly advocate that one remembers the tenets of great investing; to be thoughtful, be long-term focused and be willing to challenge our own behavioural biases”. In other words, Mr Abraham is saying not to panic.
Investing in the share market is like a marriage. You plan to be in it for the long term and you take the good with the bad. Just like any marriage there can be rough patches. Markets go up and down. This is normal. The markets have been growing for a prolonged period but last week there were signs of this “boom phase” being behind us. It is important not to panic. Generally, when corrections and crashes occur, few companies’ share prices are spared. Experienced investors know this can create buying opportunities. Share prices may fall, but for some companies their underlying business can be unaffected or even benefit. Movements like those which have been occurring over the last week create opportunities for fund managers to buy stocks which are cheaper than they were the day before.
If you are young and your investments are all inside your superannuation, you have no need to worry. Time in the market is the most important aspect for your investments. You have a long-term game plan for your money and movements are expected.
For retirees also do not panic. Just because you are retired does not mean the end of your investment life. You potentially have 30 years of investing ahead of you. Given enough time loses can be made back and history has shown that staying invested can do this.
The Importance of Staying Invested
The chart below shows the experience of three different investors and their reactions to the GFC.
- Green Line – shows an investor who stayed invested in stocks.
- Red Dotted Line – shows an investor who exited the stock market and invested in cash.
- Orange Line – shows an investor who exited the market at the bottom but then reinvested in stocks 12 months later.
Over the same period the investor that stayed in the market made higher returns. It shows that “time in market”, not timing the market, is an effective strategy of investment.
The below bar chart shows the impact of being invested throughout the last 20 years compared with missing a varying number of the “best investing days” over the same period. It shows that consistently being invested has had a higher return than missing just the 10 best days in the stock market.
The bottom chart shows the daily gains and losses in the Australian stock market since 1996. Within that “noise” are the 100 top returning days to be invested.
Bull markets are born in pessimism, grow on scepticism, mature on optimism and die on euphoria.
Sir John Templeton
It is important to remain calm during times like these. The media likes to use sensational headlines to grab viewer’s attention, sell papers and gain advertising dollars however, this can make things sound worse which promotes fear and rash decisions amongst inexperienced investors. It is important to focus on investing fundamentals. Risk and uncertainty are parts of investing which is why we put your strategy in place. While the reasons for market volatility will always vary, history has shown that markets generally revert to a calmer state after periods of instability.
If you are concerned, please contact Elliot to discuss your situation.
 Is this a bubble bursting? 8 Feb 2018 By Glenn Freeman Morningstar’s senior editor
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