As a guide to how volatile the market has been, the S&P ASX 200 index was sitting at 5,699 points at the end of July. By about mid-August it had dipped to 5,380 and then fell rapidly to 5,001 on Monday 24 August following the much-publicised correction on the Chinese sharemarket. Yet, by week’s end on Friday 28, just four days later, the ASX 200 had climbed back to 5,263 points.
The bottom line is that in less than four weeks the overall sharemarket has dropped by around 8%.
These sorts of losses are never pleasant. And even if you don’t invest in shares directly, chances are your superannuation savings will feel the impact over the short term.
When markets behave erratically it’s natural to ask whether share values will fall further, how long will it take for values to recover, and what should we be doing as investors?
Unfortunately no one can answer the first two questions with absolute certainty. But when it comes to the appropriate course of action, it’s critical to avoid hitting the panic button.
Sharemarkets are volatile by nature, capable of dishing up substantial losses―and gains―over short periods. Selling in response to a market dip only serves to lock in losses on shares that may go on to recover their value over time.
Despite the market volatility, shares also continue to be a source of healthy and tax-friendly dividend income. Over the last year Australian shares paid dividend yields averaging 4.78%. That’s almost double the before-tax return your money will earn with many savings accounts.
There can be no doubt it’s a case of watch-this-space when it comes to global and local shares. However one factor in an investor’s favour is that the latest bout of market volatility has occurred right in the middle of the reporting season when our publicly listed companies issue their annual reports. It’s a chance to see how these companies have performed in the marketplace―as opposed to on a ticker board.
Long-term investors also know that market lows represent good buying opportunities. You’ll certainly get a lot more bang for your buck on the sharemarket today than you would have had a month ago and that can translate into stronger capital gains over time.
For more information on sharemarket investing, take a look at my book Making Money.
Paul Clitheroe is a founding director of financial planning firm ipac, Chairman of the Australian Government Financial Literacy Board and chief commentator for Money Magazine.
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