The local sharemarket has taken a tumble since late April when the All Ordinaries index hit a post-GFC high of 5,954. As I write a bit over a week later it’s down about 300 points or around 5%—a sharp decline.
During this reversal I read that on one day alone $40 billion was wiped off the value of the Australian Securities Exchange (ASX).
No one likes to see their investments fall in value, and there’s no doubt $40 billion is a lot of money. However to put this in perspective, the total value of stocks listed on the ASX is $1.7 trillion.
It’s also important to note that sharemarket losses remain on paper only until an investor chooses to sell their shares. If you have invested in quality companies, there is a strong likelihood your shares will go on to recover their value over time following a market dip.
Selling as a knee jerk response to market falls doesn’t just cement any losses. It also creates the possibility that you’ll have to pay more for the shares if you choose to buy back into the market further down the track.
Interestingly one of the key factors that sets shares apart from other investments, like say residential property is that shares can be very simply—and very quickly—bought or sold through online trading. That’s not a bad thing but it does mean that when investors become rattled by sharemarkets dips it can be very tempting to bail out of the market—even though it can mean copping a capital loss.
By contrast selling an investment property can take weeks, even months. And it can come with some pretty solid transaction costs including legal fees and selling commission. This makes it much harder and more expensive to sell off a property in response to short-term market movements—so landlords quite rightly tend to hang onto their investment even if the property market is experiencing a period of falling values.
The thing is, both shares and property should be regarded as long-term assets. Resisting the urge to panic-sell gives investors in both asset classes a far better chance of pocketing healthy long term gains.
Backing this up, I came across overseas research that showed over the 20 years to 2014, US shares recorded gains averaging about 9.22% annually. Yet over the same period, ordinary investors notched up more modest gains averaging just 5.02% annually.
The main reason for the shortfall is our tendency to bail out of markets at low points and buy in during market highs. It goes to show that trying to time the market is a mug’s game. It makes a lot more sense to buy investments that suit your personal goals and stick with them regardless of short-term market movements.
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.