Many investors become concerned when volatility occurs in global financial markets – particularly about the impact on their superannuation and other investments. In times like these, it’s important to understand the causes of market movements and how to minimise your risk.
Why do markets move so much?
Markets are influenced by many things – industrial, economic, political and social factors can all have an impact. For example, consumer and business confidence affect spending and therefore company profits. Global trade and production naturally affect economic growth. Poor political and fiscal decisions in some countries may lead to a flow-on effect in other countries who are owed money. And of course, natural disasters can cause major damage to any economy with no warning. During times of market volatility, it’s important to remember one of the fundamental principles of investing – markets move in cycles.
What is the effect of market movements on investment returns?
The table below shows the effect of market volatility on different asset classes for one, three, five and 20 year periods. Looking closely, we can see that even though some asset classes have shown negative results over shorter periods, over 20 years, returns across all asset classes are positive.
Don’t lose sight of the bigger picture
Successful investing is a long term strategy. Shares, which usually form a large part of most balanced super accounts, are also generally a long term investment. They are designed to provide capital growth over a period of five years or more. Think in years, not days. The time frame for super may be 20 years or more, so short term volatility shouldn’t diminish the long term potential of your investments. Growth assets (such as shares) tend to fluctuate in the short term, but have historically provided excellent returns for investors over the long term.
When share markets fall in value, it may be tempting to sell up. However, trying to time the market by selling now and buying back later is a risky strategy that rarely results in investors coming out ahead. By taking a long term view of investing, you can ride out any short term fluctuations in the market and take
advantage of growth opportunities over the long term.
Understanding the implications of selling down
Before you withdraw from an investment you should understand all the implications, risks and costs involved:
- Crystallising losses. If the value of your investment is falling, you are technically only making a loss on paper. A rise in prices could soon return your investment to profit without you doing anything. Selling your investment makes any losses real and irreversible.
- Incurring capital gains tax (CGT). Make sure you know what your CGT position will be before selling any asset.
- Losing the benefits of compounding. If you’re thinking about making a partial withdrawal from an investment, remember that it’s not just the withdrawal you lose, but all future earnings and interest on that amount.
Timothy Donlea & Artemas Wealth Management have been providing advice to clients for over 20 years. Contact us today by clicking here or alternatively by calling us for a confidential discussion on 02 9221 9699.
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