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Seven things for investors

Share markets remain volatile and at risk of further falls, reflecting worries about inflation, aggressive central bank rate hikes, the war in Ukraine and recession fears. Some critical things for investors to bear in mind are:

  • Share market falls are regular, but the key is to make the most of compound interest
  • selling shares after a fall, locks in a loss
  • trying to time investment market moves is hard
  • Share pullbacks provide opportunities for investors to buy them more cheaply
  • Australian shares still offer an attractive income flow
  • shares invariably bottom with maximum bearishness
  • to avoid getting thrown off a long-term investment strategy, it’s best to turn down the noise


Successful investing can be challenging in such times. 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. However, 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 found technical support recently and could bounce further given high levels of negative sentiment, the near-term downside risks for shares remain high. Thus reflecting the same array of macro risks that have been weighing on them all year, notably:

  • High inflation and ultra-hawkish global central banks
  • the $US is trending up on safe-haven demand, and Fed rate hikes risking a financial accident – with mayhem in the UK adding to fears of a crisis
  • an escalation in the Ukraine war, along with other geopolitical risks
  • high and still rising recession risks
  • downward revisions to earnings expectations flowing from all this

We had a detailed look at the issues a few weeks ago, along with signs of light at the end of the tunnel, but the crystal ball gets even hazier at times like this. As always, the turmoil in markets is met with lots of prognostication.

Some of this is enlightening, but much is noise. While the weakness we are going through differs in detail from rough patches in the past, basic investment principles still apply. It’s hard to say anything new other than to reiterate them. So, apologies if you have seen “seven things for investors to keep in mind” before, but at times like this, they are worth revisiting.

Investors tip #1 Share market falls are typical – the key is to make the most of the power of compound interest

First, while they all have different triggers and unfold differently, frequent 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, they have always been the way the share market has been, so they are nothing new. Shares climb a wall of worry over many years, with numerous events dragging them down periodically, but the long-term rising trend is ultimately resuming.

Bouts of volatility are the price we pay for the higher longer-term returns from shares compared to other assets like cash and bonds. For example, consider the value of $1 invested in various Australian assets in 1900, allowing for the reinvestment of dividends and interest. That $1 would have grown to $243 if invested in cash, $881 if invested in bonds and $691,806 if invested in shares. While the average return since 1900 is only double that in shares relative to bonds, the vast difference between the two owes to the impact of compounding returns. So, if we want to grow our wealth, we need 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.

Investors tip #2 The key is not to get thrown off by cycles – selling shares after a fall turns a paper loss into an actual loss

When shares are falling sharply, it is naturally tempting to sell. But selling shares or switching to a more conservative investment strategy whenever shares suffer a cyclical setback turns a paper loss into an actual loss with no hope of recovering.

Investors tip #3 Timing is hard

Of course, you may think, “but I will reinvest once uncertainty is removed”. But the risk is that you don’t feel confident about returning in until long after the market fully recovers, which may be well above the level you sold out. Trying to time the market is challenging. An excellent way to demonstrate this is by comparing returns if an investor is fully invested in shares versus missing out on the best (or worst) days. If you were fully invested in Australian shares from January 1995, you would have returned 9.2%pa (including dividends but not allowing for franking credits, tax and fees).

If you tried to time the market and avoided the ten worst days, you would have boosted your return to 12.2% pa. If you avoided the 40 worst days, it would have been boosted to 17.2% pa. Fantastic! But this is very hard to do, and many investors only get out after the bad returns have occurred, just in time to miss some of the best days. For example, if by trying to time the market, you miss the ten best days (blue bars), the return falls to 7.1% pa. If you miss the 40 best days, it drops to just 2.9% pa. Hence the old cliché that time matters, not timing.

Investors tip #4 Share market pullbacks provide opportunities

When shares and all assets fall in price, they are cheaper and offer higher long-term return prospects. As a result of the fall in share and bond prices (and the resultant decline in PEs and rise in dividends yields and bond yields), our estimated medium-term return projections for a diversified growth mix of assets have improved from around 4.9%pa to around 6.7%pa. So, the key is to look for the opportunities that pullbacks provide. Of course, it’s impossible to time the bottom, but one way to do it is to “average in” over time.

Investors tip #5 Australian shares offer an attractive dividend yield

Particularly so when compared to bank deposits. Companies don’t like to cut their dividends, so the income you receive from a well-diversified portfolio of shares will likely remain attractive, particularly against bank deposits, even though deposit rates are slowly rising.

Investors tip #6 Shares invariably bottom with maximum bearishness

Shares and other related assets often bottom at the point of maximum bearishness, i.e. when you and everyone else feel most negative towards them. That is when investors have lots of cash on the sidelines, providing fuel for an eventual rebound. Such is the point of maximum opportunity. It is evident 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 much gloom around. Also, investor sentiment could still get more damaging in the short term before it bottoms.

Investors tip #7 Turn down the noise

At times like this, negative news reaches a fever pitch. Talk of billions wiped off share markets, and warnings of disaster help sell copy and generate clicks and views. But we are rarely told of the billions that the market rebounds and the rising long-term trend in share prices add to the share market. Moreover, they provide no perspective and only add to the panic. It makes it harder to stick to an appropriate long-term strategy and see the opportunities thrown up. Consequently, you will find it beneficial to reduce the noise of all the negative news flow.

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