Paul's Insights: Take-outs for investors in uncertain times
Spending time bunkered at home, I took to researching previous market downturns. It turns out there have been plenty over the last century, probably more than many people realise.
Fortunately, the years of positive returns have far outnumbered – and outweighed, the down years.
Even so, if you drew a line graph of sharemarket movements over the last 100 hundred years, it would resemble a profile of the Himalayas, with plenty of ups and downs.
The difference is that with sharemarkets the long term trend is progressively upward. Indeed, the outcomes of past market routs provide three important take-outs for investors.
- Don’t sell at the bottom
When we hear day-after-day about falls in share values, it’s extremely tempting to sell out. In fact, it can take nerves of steel to hang in.
But hanging in makes a lot of sense.
Covid-19 may be a new bug, but since 2000 we’ve seen a number of serious viral outbreaks. SARS (2002), MERS (2012), and Swine flu (2009) have each had a negative impact on global equity markets. But once the virus subsided – as it did in every case, markets took off.
The catch, is that to enjoy the lion’s share of the gains, you had to be in the market.
- Consider portfolio rebalancing
It may seem counter-intuitive but now can be a good time to rebalance your portfolio.
Rebalancing means selling one type of investment and buying others so that you maintain your preferred weightings across different asset classes. This ensures that your portfolio continues to reflect your goals and tolerance for risk.
Let’s not gild the lily. Australian shares have dropped 22% in the last month. Red ink has been spilled across the market, and while some sectors have fared better than others, it’s likely that your asset allocation is completely out of whack.
- Embrace dollar cost averaging
The beauty of rebalancing is that it encourages us to buy low and sell high, and shares and exchange traded funds are offering exceptional value right now.
It’s understandable that you may not feel confident tipping a chunk of cash into the market at present. The solution can be dollar cost averaging – steadily drip-feeding your money into the market by investing a set amount each fortnight, month or quarter. It’s a great way to hedge your portfolio against market ups and downs.
As always, watch the fees you’re paying on investments. This is one aspect of your portfolio you have complete control over regardless of market conditions.
Paul Clitheroe is Chairman of InvestSMART, Chairman of the Australian Government Financial Literacy Board and chief commentator for Money Magazine.
The InvestSMART Diversified Capped Fee portfolios take care of rebalancing for you and make dollar-cost averaging easy with a monthly regular contribution plan.
Frequently Asked Questions about this Article…
Selling investments during a market downturn can be tempting, but it's important to remember that markets have historically rebounded after downturns. By staying invested, you position yourself to benefit from the market's eventual recovery.
Portfolio rebalancing involves adjusting your investments to maintain your preferred asset allocation. During volatile times, like a market downturn, rebalancing can help ensure your portfolio aligns with your financial goals and risk tolerance.
Dollar cost averaging involves investing a fixed amount regularly, regardless of market conditions. This strategy can help mitigate the impact of market volatility by spreading out your investment purchases over time, potentially lowering your average cost per share.
Past market downturns teach us that while markets experience ups and downs, the long-term trend is generally upward. Staying invested and not panicking during downturns can lead to positive returns over time.
Previous viral outbreaks like SARS, MERS, and Swine flu negatively impacted global equity markets. However, once these outbreaks subsided, markets typically rebounded, highlighting the importance of staying invested.
Fees can significantly impact your investment returns over time. It's crucial to monitor and manage the fees you're paying, as this is one aspect of your portfolio you can control, regardless of market conditions.
The InvestSMART Diversified Capped Fee portfolio automatically takes care of rebalancing for you, ensuring your investments remain aligned with your goals. It also facilitates dollar-cost averaging with a monthly regular contribution plan.
Despite the volatility and numerous downturns over the past century, the long-term trend of the stock market has been progressively upward, offering more years of positive returns than negative ones.
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