It has been a challenging start to the year for Australians dealing with bushfires and now the spread of Novel Coronavirus (COVID-19) and a concern over a global pandemic. Share markets were incredibly buoyant despite these concerns; that was until earlier this week. However, it is important to view the current volatility with some perspective.
What has happened to markets?
From December 2018 to the high of last week, the S&P/ASX 300 returned approximately 31% and in the 10 years proceeding that, returned an average of 9% per annum. Concern over COVID-19 posing a greater risk to the economy caused panic across equity markets with the S&P/ASX 300 declining approximately 6% this week so far.
Whilst the situation is very much unpredictable in terms of timeframe and magnitude, if we look at previous incidents of viral outbreaks, such as SARS in 2003 and H1N1 (swine flu) in 2009, short-term corrections were within the range of 5% to 15%. These corrections were followed by strong rebounds. Whilst history is a useful guide, no one can predict what impact COVID-19 will have on the wider economy and share markets.
Forget day-to-day, it’s the long-term that counts
There are any number of reasons markets may rise or fall on any given day. Ultimately, short-term movements (up or down) should make little difference if you are a long-term investor. And reacting impulsively to daily market movements is almost always counterproductive.
What matters for individual investors is whether they are on track to meet their own long-term goals detailed in the plan designed for them. Unless you need the money next week, what happens on any particular day is neither here nor there. It is the long-term returns that count.
6 tips to put volatility into perspective
For those still anxious, here are some simple lessons to help put volatility into perspective:
1. Don’t make presumptions.
Remember that markets are unpredictable and do not always react the way the experts predict they will. For instance, you’ll see economists on the TV speculating every night about what might happen. But even if you could pick the turn, you still don’t know how markets will react. It’s pointless to speculate.
2. Someone is buying.
Quitting the equity market when prices are falling is like running away from a sale. And while the media headlines proclaim that “investors are dumping stocks”, remember someone is buying them. Those people are often the long-term investors.
3. Market timing is hard.
Recoveries can come just as quickly as the prior correction. In 2008, the Australian share market fell by nearly 40%. Some investors capitulated, only to see the market bounce by more than 37% in 2009 and rise in seven of the eight subsequent years. The lesson is that attempts at market timing risk turning paper losses into real ones and paying for the risk without waiting around for the recovery.
4. Never forget the power of diversification.
When equity markets turn rocky, other defensive assets like highly-rated government bonds can anchor the portfolio. This limits the damage to balanced investors. So diversification spreads risk and can lessen the bumps in the road.
5. Nothing lasts forever.
Just as smart investors temper their enthusiasm in booms, they keep a reserve of optimism during busts. And just as loading up on risk when prices are high can leave you exposed to a correction, dumping risk altogether when prices are low means you can miss the turn when it comes. As always in life, moderation is a good policy.
6. Discipline is rewarded.
Market volatility can be worrisome, no doubt. But through discipline, diversification, keeping focused on progress to your goals and accepting how markets work, the ride can be more bearable. At some point, values are regained and for those who did not act on their emotions, are rewarded.
Final Word
These lessons should provide a timely reminder that a well-diversified portfolio, invested over the long-term combined with not impulsively reacting to daily market movements, will provide you with the greatest chance of achieving your investment goals.
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