Paul's Insights: When investors should do absolutely, positively, nothing
Making money doesn't involve luck or knee jerk reactions. It's about planning and perspective. But sometimes the hardest part for investors is doing nothing at all.
Recent months have seen various headlines around share market movements – often along the lines of “billions wiped off Aussie shares”.
Several things about these sorts of headlines bother me.
First, the market value of the Australian Securities Exchange (ASX) is measured in trillions of dollars – $1.95 trillion to be precise. So while movements measured in billions may make for eye-catching headlines, they overlook the bigger picture – the sheer scale of the ASX.
In addition, daily reports by their nature focus on short term events. The issue here is that growth assets like shares are prone to ups and downs over short periods. That’s why equities are regarded as a long term investment – one you should plan to hold onto for at least five years-plus.
Over the last month for instance, Aussie shares have dipped 4.4%. But if we take a longer term view, investors have enjoyed average price gains of 3.96% annually over the past five years.
Bear in mind too that media reports focus on price movements of equities. Yet this only tells part of the story.
Shares can also generate lightly tax dividend income. For many investors this is the clincher that compensates for short term volatility.
By way of example, over the past five years we’ve seen plenty of newsworthy events – the rise of cryptocurrencies, several changes of prime minister, the UK Brexit vote, and the so-called US/China trade war to name a few. Not surprisingly, many of these events have had an immediate impact on global share markets.
Despite this, over that same 5-year period Aussie shares have notched up total after-tax returns averaging 8.2% annually once dividends and franking credits are taken into account.
The upshot is that when InvestSMART clients ask me how much they should be worried about headline risks, my response is “Not one bit”.
As humans we tend to react more to bad news that to good news. This explains why we’re more likely to see reports of a market dip than a subsequent recovery.
Share markets by nature are volatile. That’s a given. But if your portfolio reflects your attitude to risk and personal goals, there’s only one thing to do when you encounter negative market news: Nothing.
A more positive step is to plan for what you can control – the fees you pay on your investments. High fees can have a far more devastating impact on your portfolio over time than day to day market movements.
Are you adequately diversified or looking to start investing? Click here to view the InvestSMART Diversified Portfolios, part of the InvestSMART capped fee range.
Paul Clitheroe is Chairman of InvestSMART, Chairman of the Australian Government Financial Literacy Board and chief commentator for Money Magazine.
Originally published 14/10/2019. Figures updated 27/02/2020