Successful investing can be really hard in times like the present. Falls in share markets and other assets are stressful as no one likes to see their wealth decline and the natural inclination is to retreat to safety. From their highs last year or early this year to recent lows US and global shares have fallen about 25%.
Australian shares have held up better, remaining up from their June low at which point they had had a fall of 16% from their high in August last year, but they remain vulnerable to the lead from global shares.
While shares have managed to find technical support in recent days and could bounce further given high levels of negative sentiment, the near-term downside risks for shares remain high. And while the weakness we are going through differs in detail from rough patches in the past, the basic investment principles still apply. Let's run through seven of these principles to keep in mind in rough times like these.
#1 Share market falls are normal!
First, while they all have different triggers and unfold differently, periodic share market falls are healthy and normal. Sometimes they are just 5% to 20% corrections, but every so often they can be deep bear markets with falls up to around 50% as in the GFC.
But while share market pullbacks can be painful, it’s the way the share market has always been, so they are nothing new. Bouts of volatility are the price we pay for the higher longer-term returns from shares compared to other assets like cash and bonds.
So, if we want to grow our wealth we need an exposure to growth assets like shares to make the most of the power of compound interest, but with that comes rough patches every so often.
#2 Selling shares after a fall turns a paper loss into a real loss!
When shares are falling sharply its naturally tempting to sell. At least it may then be easier to sleep at night. But selling shares or switching to a more conservative investment strategy whenever shares suffer a cyclical setback just turns a paper loss into a real loss with no hope of recovering.
#3 Timing the market is hard...really hard!
Of course, you may be thinking “but I will reinvest once uncertainty is removed”. But the risk is you don’t feel confident to get back in until long after the market has fully recovered, which may be well above the level you sold out at.
Trying to time the market is very difficult. Hence the old cliché that “it’s time in that matters, not timing”. The best way to guard against selling on the basis of emotion after weakness is to adopt a well thought out, long-term strategy and stick to it.
Combat this typical investor behaviour and discover the CARE Investment Philosophy.
#4 Share market pullbacks provide opportunities
When shares and all assets fall in price, they’re cheaper and offer higher long-term return prospects. The key is to look for opportunities’ pullbacks provide. It’s impossible to time the bottom but one way to do it is to “average in” over time.
#5 Australian shares offer an attractive dividend yield
This is particularly so compared to bank deposits. Companies don’t like to cut their dividends, so the income flow you are receiving from a well diversified portfolio of shares is likely to remain attractive, particularly against bank deposits even though deposit rates are slowing rising.
#6 Shares invariably bottom with maximum bearishness
Shares and other related assets often bottom at the point of maximum bearishness, ie, just when you and everyone else feel most negative towards them. This is when investors have lots of cash on the sidelines which provides fuel for an eventual rebound.
This is the point of maximum opportunity. This is obvious in a way because shares could hardly bottom when everyone is already bullish because there would be no one to buy. The problem is that it’s hard for most people to commit to buying shares when there is so much gloom around. And, of course, investor sentiment could still get more negative in the short term before it bottoms.
#7 Turn down the noise
At times like this, negative news reaches fever pitch. Talk of billions wiped off share markets and warnings of disaster help sell copy and generate clicks & views. But we are rarely told of the billions that market rebounds and the rising long-term trend in share prices adds to the share market.
Moreover, they provide no perspective and only add to the sense of panic. All of this makes it harder to stick to an appropriate long-term strategy let alone see the opportunities that are thrown up. So best to turn down the noise on all the negative news flow!
To discuss your investment strategy or to learn more about the CARE Investment Philosophy, book a chat with a WCG Adviser today.
