With continued turbulence in the share market it makes sense to have a plan in place. Do you cash in what’s left of your shares or should you wait it out? Or, is the current turmoil a massive opportunity for picking up some great deals?
Adrian Shaw, a Financial Planner with the Harridge Group has provided financial advice to a broad range of clients including Senior Partners of Deloitte, the Head of an International Funds Management Group and a number of high profile CEOs, corporate managers and business owners. Adrian understands what a minefield this area is.
To assist you in getting a handle on the big picture (and as a result move away from the daily newspapers doom and gloom mentality) Adrian has put together the following article to give people a long term perspective in the face of a volatile sharemarket.
For further clarification about your own specific financial planning needs whether it be long term planning, retirement planning, regular investment and estate planning please call Adrian on 1300 651 564 or check out www.harridgegroup.com.au
1. If you have a Long Term strategy – DO NOTHING;
When you have a long term investment strategy, short term market movements should be expected and should not concern you because history demonstrates that sharemarkets recover after crashes & downturns. It is important to sit tight and ‘ride out’ the market volatility.
We have compared two of history’s greatest sharemarket crashes to demonstrate that despite the event that follow, the sharemarket recovers and continued to grow (despite the short-term pain felt be investors).
During the 1929 Stockmarket crash, the Dow Jones Industrial Average (DJIA), a common indicator of market performance, fell by 13% on 28th October 1929, which at the time was a record fall.
Almost 60 years later, on the 19th October 1987, the stockmarket incurred another famous crash, where the DJIA fell by a record 22.6% in a single day.
Arguably, the 1929 and 1987 stockmarket crashes are two of history’s greatest. However they had significantly different outcomes…
1929 Crash
Following the 1929 Stockmarket Crash, the world was driven into “The Great Depression” because interest rates were increased. It was believed that easy access to borrowed monies was the cause of the stockmarket crash and the solution was to increase interest rates. Unfortunately the rate increase slowed the economy and triggered a chain of events that drove the world into “The Great Depression”, arguably the worst financial disaster in history.
1987 Crash
In contrast, following the 1987 crash, interest rates were decreased in an attempt to provide liquidity to relieve “turbulence and tension in the wake of the financial market upheaval”. Additionally, the U.S. Federal Reserve issued a short statement before the market opened the next day on 20th October 1987:
“The Federal Reserve, consistent with its responsibilities as the Nation’s central bank, affirmed today its readiness to serve as a source of liquidity to support the economic and financial system”
The approach taken following the 1987 crash demonstrates that the financial sector is now better equipped
to manage a market down turn and consequently facilitate a more rapid recovery.
| 1929 Stock Market Crash | 1987 Stock Market Crash |
| Dow Jones Industrial Average ↓13% on ‘Black Monday’ ↑Interest Rates (to slow the economy) Recovered to Pre – Crash level in 25 years |
Dow Jones Industrial Average ↓22.6% on ‘Black Monday’ ↓Interest Rates (to stimulate the economy) Recovered to Pre – Crash level in 3 years |
2. If you DON’T have a Long Term strategy – GET ONE & stick to it:
Having a clearly defined Long Term investment strategy is vital to a successful investment portfolio and outcome. Understanding your goals will help you build your Long Term strategy and select the most appropriate investment assets to achieve them.
As investments vary in both risk and return characteristics, you will need to understand your goals and match your investments to these goals.
Short term strategies should incorporate investments with low volatility. Generally your money will need to be accessible at short notice and therefore should not be exposed to the risk of frequent capital movements (ie you may be forced to sell an investment when it is undervalued, resulting in a loss).
Longer term investments (like property and shares, known as growth assets) can accept greater volatility because they are not required in the short term and can therefore ride out the short term ups and downs. Additionally growth assets offer the potential for greater returns, which is compensation for the exposure to short term market movements.
When investing, it is important to consider the risks associated with those investments. Remember, higher returns generally come with higher risk – so be realistic…
3. If you’re waiting to invest – DON’T – there is always something that makes it seem like waiting is a good idea… However you may never end up investing
The market has always experienced periods of volatility and will continue to do so. The recent falls in the stockmarket highlight the opportunities that currently exist to enter the market by acquiring quality assets at a discount price. It is important to note that there will always be events occurring in the world that make it seem like a “bad time” to invest… however to achieve long term growth, you will at some point need to enter the market.
Putting Things into Perspective
The chart below represents the long term growth of the Australian sharemarket between 1900 – March 2008. It highlights significant historical events during the period and the relevant stockmarket value. We can see that the market recovers and continues to grow despite the occurrence of significant historical events.
What Does This Mean For My Investment Strategy?
For those with a long term strategy… Sit back and relax… The market will go up & down and down & up… When the market does fall it may be a good time to invest more monies.
For those that don’t have a long term strategy or are unsure when to invest, generally a stockmarket fall represents a discount sale of quality assets, due to the tendency of markets to panic and lose sight of the long-term real value of investments. The key to building long-term wealth is to ignore short-term market noise, seize opportunities and focus on your long-term strategic plan designed to achieve your objectives.
Adrian Shaw, an experienced Financial Planner was commissioned by the Financial Planning Association of Australia to develop an education program entitled ‘The Value of Advice’. His areas of expertise include Wealth Accumulation Strategies; Self Managed Superannuation; Superannuation Planning; Estate Planning and Risk Insurances. If you would like to speak to Adrian for specific advice on your own situation please call 1300 651 564 or checkout The Harridge Group.
Past performance is not a reliable guide to future returns as future returns may differ from and be more or less volatile than past returns.
Adrian Shaw & The Harridge Group Pty Ltd are Authorised Representatives of Godfrey Pembroke Ltd Australian Financial Services Licence No: 230690 an Australian Financial Services Licensee, Registered Office at 105 - 153 Miller Street, North Sydney NSW 2060.
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the market rallied immediately after the crash, posting a record one-day gain of 102.27 the very next day and 186.64 points on Thursday October 22. It took only two years for the Dow to recover completely; by September of 1989, the market had regained all of the value it had lost in the ‘87 crash. I see this slide continuing for the rest of the year at least. Good point on long term positions