Share market turbulence has dominated media headlines in recent weeks.
Many investors are wondering: When will things return to normal?
The answer is, this is normal for share markets. This is what markets do – though sometimes with more gusto than others. While we shouldn’t be surprised by these market fluctuations, it is natural to feel uncomfortable when the market dips.
Somehow we forget that we’ve had these same bumpy rides in the past. Many of us, looking back at our healthy long-run performance averaging say 7% or 8% a year, we can be lured into believing that the past was a smoother ride.
But was it as smooth as it seems?
Let me share with you a series of headlines for stories talking about the bumpy ride in the Australian share market.
- Australian sharemarket ends firmer after bumpy ride (Business Spectator)
- Australia’s market in for a bumpy ride (ABC The Drum)
- Onward and upward, but a bumpy ride (weekend AFR)
- A bumpy ride ahead: Australia’s economy and the ‘new normal’ (The Conversation)
- Aussie stocks take bumpy ride (SBS News)
- Shares seesaw as investors look for direction (ABC News)
- Bumpy ride: Dollar dips, shares slump, rates held (news.com.au)
Each one could headline a story right now, couldn’t it? And yet, these headlines relate to stories that appeared over the five years from 2010 to 2015.
So what does this tell us?
First, it tells us that share markets regularly exhibit levels of volatility that provoke such headlines – and investor discomfort. Every year over the past five years (2010 to 2015) we’ve experienced markets that have delivered us, at least some of the time, a bumpy ride.
Second, it reminds us that a bumpy share market does not necessarily mean poor share market performance. For example, despite the dire predictions in 2012 and 2013, the ASX 200 returned 9% and 10% per annum respectively.
Finally, as you’ve heard us say many times before, it highlights that no one – not even the most well-informed expert – can predict how market fluctuations will play out. Whenever there’s a bump in the market all the big brokerage firms, economists and banks come out with analysis of what they believe is happening and predictions of what they believe will happen next in the financial world.
Right now is no exception.
For most investors, the volatility is disconcerting. You probably feel like you should be doing something, but what?
What can you do?
The most important thing is to go back to your financial plan.
There are many reasons having a financial plan is valuable, and one of the most important is that it can help guide you in times of volatility. If you have a well-designed plan, it will articulate your values and goals, and a strategy for how you can achieve them. It should have an investment strategy, includes an asset allocation that matches your comfort level with risk and so gives you the greatest chance of meeting your goals.
A good plan accounts for the reality that markets will go up and down in the short term. It acknowledges that the timing of these ups and downs is unpredictable – and that no one can forecast which years will be good, and which not so good.
When the ride is bumpy, and your equanimity is tested, go back to your financial plan. It should help you reduce your anxiety so you can live well, and sleep well.