Market Volatility – The Order of the Day
Up 1% one day then down 3% the next day then up 2% then down 2% then flat for 3 days then down 2%. It is enough to make us jittery especially when this sort of VOLATILITY continues for a month or more.
Keeping it simple – Sometimes it is important to remember just like a lift in an office building:
“IT MUST GO DOWN BEFORE IT CAN GO BACK UP”
The lift cannot go up for ever (before it needs to go down again) – there is a limit to the top floor. A bit of philosophy – in our own makeup for one to be happy then this state of mind has to have been preceded by unhappy, or at least, not so happy.
A negative or positive must be (at some stage) preceded by one or the other. That is mathematics.
We ask ourselves what is around the corner. We don’t have a special ‘around the corner’ mirror (as per multi story shopping centre parking areas) to see ahead. It would be nice if we did. We could sit on the beach all day and invest with no jitters because we know what is going to happen.
Share markets over 20 to 30 plus years have provided returns of approximately 10% to 12% per annum (income and capital growth). It would be nice for this to be a fairly even steady say 1% a month, every month. But unfortunately, the market does not work that way and we get variations (sometimes extreme). This is the price we pay for trying to get a return well above inflation over the long term.
Nevertheless, we can invest (especially regularly to get the benefits of dollar cost averaging into the market) knowing that “things” will turn around (meaning perhaps less volatility) and returns from the share market (with a well-diversified portfolio) will revert to a mean over the long term.
RECESSION – LONG TERM BOND RATES ARE LOWER THAN SHORT TERM BOND RATES
There is a lot in the media about the INVERTED YIELD CURVES and the possibility of these leading to a US recession – again we cannot predict with absolute certainty however, with continued support from US monetary policy, US unemployment falling to record levels and limited growth in US public sector debt, there is little supporting indicators to suggest a recession is nearby.
In the immediate short-term, share markets will most likely continue to be volatile and could still fall further as US trade issues and economic growth uncertainties remain at the forefront of World News.
Moreover, the following points need to be kept in mind during these uncertain and volatile times:
- While shares may have fallen in value, on average the dividends being paid from the overall market have not fallen. The income you are receiving from a diversified portfolio of shares remains much the same and very attractive versus fixed interest rates as well as franking credits that may apply.
- Daily/Weekly/Monthly drop downs in markets are healthy and normal. This volatility is the price we pay for the higher long-term return from shares. Recent good growth since last year meant there was always going to be some pullback.
- Selling shares or switching to a more defensive or conservative strategy after falls in the market just locks in a loss of capital. We should always have a long term investment view which has been well planned and not subject to the emotion resulting from volatility.
- For retirees in particular (but even accumulators) with cash rates at very low rates, a large portion of our investments in this area will have an impact on “HOW LONG WILL MY CAPITAL LAST IN RETIREMENT”.
- Try turning off the TV, the phone and not reading the newspaper as this makes you more oblivious to all the hype/noise – not practical and just kidding of course. They (THE MEDIA) don’t talk much about a market that does 3% in one or two days.
At Plus 1 Group, we are available at any time to discuss issues of this nature with due regard to your investments or financial planning generally.