In January markets plunged some 10 percent but then staged a recovery. This volatile start may well be an indication of how the rest of the year pans out(i).
The key reasons for this volatility are fear of inflation, the prospect of rising interest rates and pressure on corporate profits. Add ongoing concerns surrounding COVID-19 and the conflict between Russia and Ukraine, and it is hardly surprising that markets are on edge.
But fear and the inevitable corrections in share prices that come with it, are all a normal part of an investment market cycle.
Rising interest rates and inflation traditionally lead to downward pressure on shares, as the improved returns from fixed interest investments start to make them look more attractive. However, it is worth noting that inflation in Australia is nowhere near the levels in the US where inflation is at a 40-year high of 7.5 percent. In fact, the Reserve Bank forecasts underlying inflation to grow to just 3.25 percent in 2022, before dropping to 2.75 percent next year.ii
Governor of the Reserve Bank of Australia, Philip Lowe, concedes interest rates may start to rise this year, with many market analysts looking at August. Even so, he does not believe rates will climb higher than 1.5 to 2 percent. After all, with the size of mortgages growing in line with rising property prices and high household debt to income levels, rates would not have to rise much to have an impact on household finances and spending.iii
Even with rate hikes on the cards, yields on deposits are likely to remain under 1 percent for the foreseeable future, compared with a grossed-up return (after including franking credits) from share dividends of about 5 percent.iv
The old adage goes that it is “time in” the market that counts, not “timing” the market. Meaning – if you rush to sell stocks because you fear they may fall further, you may risk not only turning a paper loss into a real one, but may also risk missing the possible rebound in prices later on.
Over time, short-term losses tend to even out. Growth assets such as shares offer potentially higher returns in the long run, with higher risk of volatility along the way. The important thing is to have an investment strategy that allows you to sleep at night and stay the course.
Chance to review:
A downturn in the market can also present an opportunity to review your portfolio and make sure that it truly reflects your risk profile. Years of bullish performances on share markets may have encouraged some people to take more risks than their profile would normally dictate.
After many years of strong market returns, it is possible that your portfolio mix is no longer aligned with your investment strategy. You may also want to make sure you are sufficiently diversified across the asset classes to put yourself in the best position for current and future market conditions.
A recent study found that retirees generally have a low tolerance for losses in their retirement savings. Retirees often favour conservative investments to avoid experiencing downturns, but this means they may lose out on strong returns and capital growth, if the market rebounds.
Over the long-term, shares tend to outperform all other asset classes. And even when share prices fall, you may still be earning dividends from those shares. Indeed, the lower the price, the higher the potential yield on your share investments. And it is also worth noting that with Australia’s dividend imputation system, there may also be tax advantages with share investments.
Investments are generally for the long-term, especially when it comes to your Super. Chopping and changing investments in response to short-term market movements is unlikely to deliver the end results you initially planned.
If the current turbulence in world markets has unsettled you, please call us to discuss your current investment strategies.
DISCLAIMER: Please remember that past performance is not a guarantee of future performance.