SHARE MARKET LESSONS OF THE LAST SIX MONTHS:
By Paul Nicol
It certainly has been a rollercoaster ride being a share market investor over the last six months!
It was not so long ago a confluence of events rattled global markets during the latter part of 2018. A US-China trade war. A slowing economy in China. Brexit. Mixed signals from the US Federal Reserve. Unsettled politics in Australia and globally. This cocktail of events has led to a reasonably large liquidation of positions with the Australian share market falling 11% between 1 October and 20 December. Due to the poor finish to 2018, most asset classes finished negative for the 2018 calendar year.
No one can predict the short term movement of markets, but we started getting questions from clients questioning if they should liquidate their portfolios to protect against further losses. During this period, the selling seemed indiscriminate, and sentiment seemed unreasonably bearish. We encouraged clients to see through the short term pessimism and stick to the game plan of being a long term investor.
Fast forward to the time of writing; the S&P/ASX 200 has reached its highest point in 11 years. The doom and gloom predicted in the latter part of 2018 hasn’t eventuated and the losses of this period have been recouped with most portfolios now posting decent returns over this period, as can be seen in the graph below:
As is always the case with share markets, meaningful reflection can lead to life-long lessons learned. These lessons include:
- Many investors panic at precisely the wrong moment. Selling your stock market exposure after a significant decline in the quoted value of the investment is generally NOT smart investing.
- Periods of volatility often provide the most significant opportunities for investors who can remain focused and rational. But, this is easier said than done. Focusing on why markets have fallen and adding selectively to the best opportunities (if possible) can add meaningfully to long term returns.
- No one can predict when a particular stock market decline will cease, so we see any such exercise as mostly futile. If you are a share market investor, you have to be prepared to be in it for the long term.
- If nothing has changed about an investment’s prospects, but the price has declined significantly, this is often an opportunity to increase your exposure to the investment.
Warren Buffett has been most prolific at sharing his thoughts on what makes successful equities investing. One of his most quoted pearls of wisdom on share market investing is as follows:
“The most common cause of low prices is pessimism – sometimes pervasive, sometimes specific to a company or industry. We want to do business in such an environment, not because we like pessimism but because we like the prices it produces. It’s optimism that is the enemy of the rational buyer.”
Senior Financial Planner
SMSF Specialist Advisor™
Barron’s Top Financial Adviser 2017 & 2018
Authorised Representative No. 230876
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