Sharemarket Volatility

Matt Richardson

Can you handle the truth??

There have been some amazing swings on the US Sharemarkets’ Dow Jones Index in the last few weeks.  On some days the market has been close to 1,000 pts (approx. 4%) down during a daily trading session.

Obviously, the Australian Stock Exchange behaviour tends to mirror what is happening overseas and we are starting to see emotions such as fear & panic creep back into the market due to this volatility.  The 2017 calendar year has actually been one of the “smoothest” over the last 12 months.  The US market has risen around 30%, investors have been optimistic and the markets have made some placid, but gradual gains.  The TRUTH is – this is completely ABNORMAL behaviour for a stock market.

Markets are VOLATILE and have been for their complete history!

A few weeks ago I read an excellent article by Scott Phillips from The Motley Fool, which tried to put some perspective on what was happening on global stock markets on a day where all markets were sliding heavily.  A lot of what I write below comes from Scott’s article.

The first thing you see on TV or read from the press is “BILLIONS WIPED OFF ASX TODAY” – but very rarely to you see or read about the BILLIONS plus BILLIONS which have been gained over the last 12 months.  Or rarely do the same news outlets have as lead stories on the gains which may be recovered the day after these losses occur!

No investor, not even the most seasoned and thick-skinned investor, enjoys the experience of the value of their investments dropping wildly.  We would all prefer a smooth run watching the share price of our favourite company go from $3 to $10 over a couple of years.  When in reality it might be a stomach churning experience going from $3 to $7 , then $2 to $5, then nowhere, then to $10!

So what is the solution?  Face the fear, accept volatility, large market losses will happen (and it hurts when it happens!!) but also accept no-one knows when losses will happen or for how long.  By selling out when things get volatile, you still have to choose another place for your money.  It has been proven time and time again, that staying in the market and continuing to receive a growing income stream of dividends, has been a better option that selling in a down market and converting your investment into cash.

Lots of “experts” continue to predict sharemarket crashes.  Just about every year there are predictions by many, of huge losses on the stock market (or the property market for that matter), most of which never occur.  But if they keep predicting it these scaremongers will obviously be correct one day.  One quote I enjoyed in Scott’s article was “economists have predicted 9 of the last 2 actual recessions”!

So how do you put the odds back in your favour?  According to Scott Phillips:

  1. Buy quality companies with strong business and attractive futures;
  2. By paying good prices;
  3. By remembering that markets tend to rise, on average, over time;
  4. By copping volatility on the chin, not because we like it, but because we know it is inevitable;
  5. By investing regularly, adding cash frequently and taking advantage of buying good companies at lower prices.

No less an authority on investing than one of the world’s richest men, Warren Buffet says “Be greedy when others are fearful and fearful when others are greedy”.  This translates to, if the market is in freefall, what opportunities are there to buy a great company at a cheap price.

Good luck with your investing – steel yourself for the bumpy ride!