WEEKLY E-MAIL

18 September 2017

VOLATILITY – SHOULD YOU RIDE IT OUT?

By Denise Slattery

Low levels of volatility in equity markets can be interpreted by some as a sign of investor complacency that may lead to eventual market collapse. But a market without volatility would be unnatural – much like an ocean without waves.

The reality is that for the long-term investor, market volatility is largely irrelevant.

Focusing on the long-term market trends rather than short-term movements should give investors the confidence to ride the waves of volatility. When examining historic equity market data, we see a trend of rebounds following equity market pullbacks. That means that investors who jump ship after a big wave may have broken the cardinal rule of investing by ‘selling low’.

Every year, the equity market will experience a pullback or short-term drop. Since 1994, the average size of the intra-year decline for the ASX 200 has been 14.3%. Despite this fact, the equity market has ended the year higher than it began in 17 out of those last 23 years. That’s why it’s important for investors to ride the wave of volatility through its full cycle.

Frequent pullbacks in the market can be unsettling and tempt investors into trying to time the market. Being fully invested is particularly important when there is volatility because the best and the worst days in the market tend to be clustered together. If you were lucky enough to miss the worst days, you also were likely to have missed the best days.

A fully-invested portfolio would have returned more than three times one that missed the 30 best days in the market over the last 20 years as detailed in the chart below.

Performance of a $10,000 investment between 1 January 1997 and 31 December 2016.

Total returns for the ASX 200 Index

Source: Standard & Poors – The percentage shows the average annualised return over the 20 year period

Historically, the rolling returns for equities in a single year have varied from a loss of 38% to a gain of 47%. Fortunately, it is possible to gain an element of portfolio stability through diversification. While equities tend to perform better with economic growth and moderate levels of inflation, rate-sensitive fixed income is important to portfolios when economic growth falters.

While a combination of various asset classes should improve portfolio returns, diversification is most useful when it comes to keeping a portfolio on an even keel.

Though it’s impossible to predict the future, expecting market volatility in the coming years is a safe bet. Just as the last 20 years have favoured the diversified investor, we expect the next 20 years to do the same.

History shows that diversification and rebalancing are the best tools for reducing portfolio volatility and providing a gentler ride through sometimes difficult seas.

Denise Slattery
Senior Para-Planner
Authorised Representative No. 304356

If you have any questions or comments, please email me at denise@gfmwealth.com.au

Disclaimer: This document is not an offer or invitation to any person to buy or sell any interest in or deposit funds with any institution. The information here is of a generic nature, and does not take into account your investment objectives or financial needs. No person should act upon this information without firstly seeking competent, professional advice specifically relating to their own particular situation.

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