Markets in Review: 'Red October' in perspective
Ignore the clickbait
Instead, focus on the beauty of total returns and diversification.
‘Red October’ is a clickbait headline of the highest order. Ignore the media hyping up the slump we’ve seen this October – “S&P has worst month since 2009” and “All gains of 2018 wiped out” – these headlines completely ignore the longer-term facts of markets, investment and diversification.
Get some perspective
Looking at it long term, over the last 20 years, the ASX has seen five corrections. That’s one correction* every four years. (*A correction is a 10 per cent decline or more.)
Corrections are part of the natural market cycle, and on average, corrections persist for nine months. The market jargon ‘up the stairs, down the elevator’ exists for good reason:
Now let’s drill into the last correction and what has happened since. The previous correction was June 2015 to February 2016. On both a capital gains and total return basis, the ASX has since done well, as you can see below:
Of course, even more of the same can been said for the US. Despite being a low-yield market, the total return of the S&P 500 over the last couple of years has been supercharged:
Eggs across the baskets
Market events like the current one also illustrate the importance of diversification. When you position asset classes on a risk curve, it typically looks something like this:
And yet, in the real world, the risk-return curve can look a little different ... and for a long time that's been to the advantage of the intelligent investor:
Clearly, the return for equities over the past 10 years has well outstripped defensive assets. However, if we drill into this and look at the past three months, defensive assets such as fixed income and cash have stood up against market volatility, maintained their capital position, and maintained their yield returns:
As clouded with sensation as an event like ‘Red October’ may be, the facts remain clear. Over the long term, total returns will come out in your favour if you are diversified across asset classes because it smooths out market volatility. Diversification is the essential ingredient for wealth protection.