December 21, 2018

Act in Haste, Repent at Leisure

Market pullbacks like the one we are currently experiencing are not pleasant, however we need to remember that we are investing for the long term, with an appropriate asset allocation across shares, property and fixed interest.

The below article published by Statewide is a timely reminder of the saying “act in haste, repent at leisure”.

Why you shouldn’t ‘jump ship’ when the stock market’s falling.

It’s understandable that when you see your investments decline, your first reaction is to try to stop the decline and often to sell out of the market completely. This is our flight instinct kicking in… but quite often this is the worst instinct for making a financial decision.

When it comes to securing your financial future, history shows us that a hasty decision to sell in a dip, will often be detrimental to your hip pocket down the track.

1. Stay calm – don’t panic sell!

For long term investors, panic selling has rarely been a good idea.

Looking back to the Global Financial Crisis (GFC), in particular March 2009 when the market fell nearly 50%, those who did not sell and retained their portfolio saw Australian shares climb 15% p.a. for the next 5 years on average, and fully recovered their losses. Then over the year to February 2016 Australian shares fell nearly 14%, but by the end of 2016 investors had made their losses back.

Fidelity (a leading investment and asset management company) produced the following long term chart showing that over the past 30 years Australian shares have produced returns of over 9% p.a and global shares over 7% p.a despite many large market sell-offs during this period, including the GFC.

Australian and global shares
Source: Fidelity

2. Find the silver lining

Warren Buffet, one of the world’s most successful investors, once said “Be fearful when others are greedy, and greedy when others are fearful”, and he makes a good point. The truth is that when we’ve seen these big market sell-offs in the past, they have almost always been a buying opportunity.

But be aware that any on-going sell off period could indicate the beginning of a sustained downward trend in stock prices, also known as a bear market. Before you act it’s always good to check economic fundamentals - if the economy is strong and corporate earnings are still healthy, there is nothing wrong with rebalancing your portfolio. Just make sure you are sticking to your investment objectives and you’re not investing on emotion.

3. Patience is a virtue

Warren Buffet also said “The stock market is going to advance over time… businesses are going to be worth more money”.

You may be tempted to switch into cash during times of market volatility but if you switch out of the market at the wrong time, you may be locking in your losses and giving up the opportunity for a future bounce in returns. The following chart by JP Morgan shows that if you were fully invested in the Australian stock market over the 20 years to 2017, you would have earned 9% p.a. However, if you switched out of the market and missed just the 10 best days in the market, your return would fall by nearly a third to 6.5% p.a and if you missed the best 30 days, your return falls further to just 2.9% p.a. for the period.

Returns of the ASX 200 Index

There is no doubt that it can be distressing when you see your investment losses on paper and your account balance is falling, but remember to keep your long term perspective and stick with your goals. Having staying power is how you are going to make good money over the long run.

Last month: Are You Active or Passive?