How do you know what to do as the share market inevitably peaks and troughs? Based on recent volatility, here is a quick share market update with some valuable information to sink your teeth into in any downturn, upward trend and everything in between.

Watching share market movements often feels akin to a bad rollercoaster ride for many investors, and more so recently given many global stock indexes and the ASX are spending more time in the red than many are used to.

Worried about the share market?

This is why you should stay put.
When it’s hard to see anything but trouble ahead for equities, moving into defensive assets such as cash might seem a tempting way to protect your nest egg.

Understanding market downturns

Nearly everywhere you turn, from friends and colleagues to news channels, you can find someone with a strong opinion about the financial markets. At the moment, it seems that the news on so many fronts is bad with skyrocketing energy costs and both equity and bond markets down significantly since the start of the calendar year.

While investing in the share market is typically a prudent choice for investors seeking long-term growth, sharp drops can still be hard to stomach. Below are some things to keep in mind if a market tumble makes you feel the need to “do something” which might shut you out of the strong recoveries that have historically followed share market downturns.

Share market

Downturns aren’t rare events

Typical investors, in all markets, will endure many of them during their lifetime.

There have been 9 Bear markets since 1980.

Bear Markets

There has been a lot of focus on the transition to a bear market (with the line in the sand of a 20% decline having been triggered by the US S&P 500 index in mid June 2022). This is the same share market that delivered returns of 36% for the year ended December 2021, and even with a 20% decline at the onset of the Covid pandemic, recorded 7.3% for the year ended December 2020.

It is important to keep in context that despite several bear markets, the market has also continued to trend higher over the long term. Not all financial market declines are the same in length or severity. For example, historically speaking, the GFC of 2008-2009 was an extreme anomaly. As challenging as that event was, it was followed by one the longest share market recoveries in history.

Maintaining a long-term perspective

The Australian equity market (which admittedly recorded a more modest, but still very respectable 17.5% for the year ended December 2021), has held up relatively well, posting a decline of 11% (so not yet in bear territory).

Dramatic market losses can sting, but it’s important to keep a long-term perspective and stay invested in order to participate in the recoveries that typically follow.

Some bear markets since 1980 have been sharp, but many bull market surges have been even more dramatic, and often longer, leaving stock investors well compensated over the long term for the risk they took on.

But such action would shut you out of the strong recoveries that have historically followed market downturns. The answer is to come up with a game plan before the next market pullback so you’re well positioned to try to take advantage of the opportunities that follow. What’s more, you’ll probably know what to expect as the share market cycle through it’s phases, so you can tune out messages that don’t help your strategy.

Notes: 1  This diagram represents the price increase and period up to 30 June 2021. Calculations are based on the S&P All Ordinaries Index for the periods 1/1/1980 to 30/6/2021.

A bear market is defined as a price decrease of more that 20%. A bull market is defined as a price increase of more than 20%. The plotted areas depict the losses/gains ranging from the minimum following a 20% loss to the respective maximum following a 20% appreciation in the underlying index. Calculations based on monthly data. Logarithmic scales are used for this illustration. All distributions are reinvested.

Timing the market is futile

The best and worst trading days often happen close together and occur irrespective of the overall market performance for the year.

As the random pattern of returns below highlights, predicting which segments of the markets will do well is also a tough order. Broad diversification keeps you from having too much exposure to the worst-performing areas of the share market in the event of a downturn.

The best defense  

Making a plan and sticking to it.
By focusing on the factors of your investing strategy we can control (including things such as asset allocation and costs) and not worrying about those things out of our control, such as downturns in the markets and economy, you can prepare your portfolio for the financial market shocks.

Remember that bearish share market conditions—while inevitable—don’t last forever. As a savvy investor, you can ignore short-term pullbacks of the market (and any commentary that might cause you to veer off course) and remain committed to achieving your long-term vision. Downturns come and go. The results of a well-designed and faithfully followed plan, on the other hand, can serve you the rest of your life.

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If a long-term wealth strategy to build and protect your wealth is important to you, call us on 08 7111 0022 or  to book a time with us. Or jump straight in – book a more holistic review of your wealth and goals here. 

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*Reference Source: Vanguard

Disclaimer: This article is educational information only. It is not intended to imply any recommendation about any financial product(s) or to constitute tax advice. The information in the article is reliable at the time of distribution, but may not be complete or accurate in the future.

General Advice Warning: The information is provided for information purposes and is of a general nature only. It is not intended to be and does not constitute financial advice or any other advice. Further, the information is not based on your personal objectives, financial situation or needs. You are encouraged to consult a financial planner before making any decision as to how appropriate this information is to your objectives, financial situation, and needs. Also, before making a decision, you should consider the relevant Product Disclosure Statement available from your financial planner.

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