Thinking ahead
Don’t let market fluctuations ruffle your feathers, keep focussed on that nest egg ahead.
In the past few weeks, there has been some volatility in investment markets both here and in the US. Understandably this may cause some alarm, but it’s best to keep it in perspective and maintain a long-term view.
Historically, shares have provided good long-term results in comparison with the other main asset classes - property, fixed interest and cash.
But from time to time, market corrections occur as part of the normal cycle. This was the case in mid-August when the Australian sharemarket fell 10% from mid-July and the US market 8%.
When this happens it’s important to remember that although market moves can be quite dramatic day-to-day, they tend to follow an upwards cycle in the long-term.
This can be seen from the graph below showing asset class performance over the past 25 years.
As you can see, all asset classes have provided positive returns over time. For example, if you had invested $10,000 worth of shares back in 1982 and reinvested your dividends, your investment would now be worth over $300,000.
Since 1989, the sharemarket has dropped by 10% or more, eleven times other than this one.
And of these eleven times, eight have signified mere corrections with the market resuming its upwards trend within less than six months.
Recent market volatility was sparked by a high level of defaults in the sub-prime mortgage market in the US, which is made up of low quality high risk housing loans. These defaults affected credit markets and global sentiment.
But in the week following 20 August, sentiment started to recover and the market jumped back up 7.4%.
No one can predict exactly what will happen to sharemarkets in the short-term. That’s why we recommend having at least three to five years to invest in shares.
Although shares may be more volatile than other asset classes in the short-term, they are an important part of a diversified portfolio. They also offer benefits such as an income stream, capital growth and tax advantages. And both Australian shares and International shares are essential to diversification.
Remember the higher volatility the greater potential for return. By avoiding growth assets like shares, you run the risk of earning less than inflation or not effectively diversifying your assets.
You know what they say - when it comes to finances, the biggest risk of all is not taking any. Despite recent market volatility, the Australian economy continues to remain strong.
With a steady labour market, the outlook for consumer spending is still going strong and continued growth in China still supports the resources sector.
In times of fluctuation just remember your long-term plan, and if you’re concerned seek advice from your financial adviser.
Past performance is not an indicator of future perfomance.