If this month is anything to go by, market volatility is here to stay in 2018.
In early February the US stock market fell sharply, sending shockwaves across global financial markets including Australia.
When we see media reports telling us that billions of dollars in share values were being wiped out in a single trading session, it’s understandable that many investors and retirees feel uneasy and vulnerable.
The risk is that such events spook investors into making knee jerk financial decisions to their long-term detriment.
Putting in context.
While the February correction saw share prices across a range of stocks tumble, not all assets were tarred with the same brush.
Diversified corporate bonds actually moved higher while alternative assets such as water and direct property were not affected and unhedged international assets held up, supported by a lower Australian dollar.
The Australian share market has rebounded somewhat since those early February falls, however most commentators agree that uncertainty is here to stay.
We can expect to see more ebbs and flows in share markets over the year given the various economic and political issues at play.
Investing should never be a simple ‘set and forget’ strategy and while some market movements may uncover attractive buying or selling opportunities, it’s vital to keep focus on the long term wealth creation objectives.
Importance of diversification
Perhaps the most important take-out from the February experience is the role of investment diversification.
The share market should only make up a portion of a long-term investment portfolio.
Alternative assets and fixed interest assets are underrepresented in most portfolios yet they can provide attractive returns and reduce risk.
Diversification does not mean less return, instead if done correctly it can mean a smoother return.
For investors looking to grow their nest egg, volatility can be a good thing.
Someone in their 40s and 50s still has multiple years of contributions ahead of them and a short term dip can present an opportunity to buy good quality stocks at a lower price. It’s not about altering well-balanced portfolio allocations but accumulating assets within each class and staying the course in terms of a long-term investment strategy.
For those living off the income of their investments, (eg retirees with pensions) having a well-diversified portfolio with an allocation of cash and fixed interest allowing for at least 18 months’ worth of income draw down, combined with income from growth investments, can avoid the need for forced selling during a market correction.
For those pursuing a gearing strategy, having a sufficient financial foundation and level of diversification is important. Those with a gearing strategy need to have a greater awareness of their financial situation and strategies and not be overly reliant on financial advisers. These investors need to take greater care and have an increased sophistication in regards to their investment knowledge. A strategy for market sell downs is another key consideration and may involve stop losses, additional contributions and a portfolio that includes alternative assets that can make money in volatile markets.
Now is also the time to be holding larger amounts of cash and there are a variety of good cash accounts providing attractive returns. Be careful of locking money into term deposits because the ability to purchase on the day may be far more rewarding than achieving an extra half a percent
For more information or to find out how William Buck can help you achieve your financial goals please contact Adrian Frinsdorf on 8409 4333 or at Adrian.frinsdorf@williambuck.com.
