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Staying in control in a volatile market

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When your savings take a dive

Peter Quinn is a practicing CA and licensed financial planner with five offices in Sydney and more than 20 years’ experience in the industry. Amongst his specific areas of expertise are strategies for minimizing tax, planning insurance, managing superannuation and navigating the money markets. In this article Peter Quinn looks at the benefits of taking a long term perspective rather than hoping for speculative wind falls, and spreading your risk through dollar-cost averaging and diversification based on quality information.

 

LOOK BACK TO WHERE IT ALL BEGAN…

Why did you invest? What were your goals and the time horizon of your plans? For example if you are a share trader, then the current market volatility is of serious concern. However, if you are investing in a superannuation fund and you are unable to access your super until retirement (which is not for another 5 years or so) then the daily volatility is of less concern.

During periods of volatility some people panic and are tempted to move their money out of the share market. It is important to remember that markets move in cycles. Peaks and troughs are an intrinsic part of investing. While the cycle is unpredictable, it’s important to reflect and understand that history has shown us downturns are followed by recoveries and vice versa. If you move out of the market during volatile times, then you will not be there for the recovery, which can sometimes arrive unexpectedly and take off quickly.

REFLECT ON WHAT WE HAVE LEARNED

The 1990s provided a period of stability and sustainable growth for investors, yet by the end of the decade, a series of events that were largely unpredictable had taken their toll on investment markets. The ‘tech-crash’, September 11, corporate corruption, the global economic slowdown, and the war in Iraq all contributed to volatile conditions in the markets.

From 2003 the global economy started its recovery and conditions stabilised, giving markets the opportunity to respond favourably. At the beginning of 2007 the ASX was 83.1% higher than it was at its highest point in the 1990s*.

Throughout any market cycle, those people who remain focused on their long term goals and resist making snap decisions, are likely to be the winners.

PLAN ON TIME IN THE MARKET RATHER THAN TIMING THE MARKET

Remember you are investing to meet long term goals. The cyclical nature of investment markets make it impossible to predict their rise and fall. However, by looking at the past we can observe how markets usually perform, which will help get a perspective of potential future market movements. Here is a snapshot of major historic events which serves as a reminder of events affecting markets and the upward swings which followed:

• The 1974 OPEC oil crisis sparked a 50% drop in the market. Four years later, the market had recovered its value, and continued to climb higher for the next two years.

• On 20 October 1987, the All Ordinaries index fell 25% in one day and continued to lose ground over the next five months. It took six years for the market to regain its value, but since then the All Ordinaries has risen more than 200%.

• In 1997, the Asian crisis resulted in a 10% slide on the market in a single month. One year later the market returned to its original value and gained an additional 10% the following year.

Please refer to the attached graph highlighting other significant market movements over the last 30 years.

DOLLAR COST AVERAGING

This is a strategy to invest into the markets at regular intervals, regardless of the market conditions. Given that it is difficult to predict the future, averaging your investment into the markets reduces the risk of investing at the top. Committing to follow this strategy strictly will help remove emotional decisions, making it easier to stick to a long term investment plan.

DIVERSIFICATION

As the saying goes “don’t put all your eggs in the one basket.” Minimising your investment risk is very important and diversification should assist. Where appropriate, we encourage our clients to invest in different asset classes such as property, shares and cash across a number of countries in Asia, Europe and America by using a number of different fund managers with different expertise.

Type of Diversification Achieved by

Across asset classes Including a range of asset classes in your portfolio. For example, your investment portfolio may contain shares, property, fixed interest and some gold bullion.

Within an asset class Within Australian Shares for example, you may buy shares in
companies that operate in different industries, such as mining,
retail, banking and biotechnology.

Across countries Reducing your exposure to a single country or region. You may
wish to have investments in Australia, the US, Europe and
China.

Managed funds provide an easy route to diversification. Through a single managed fund it is possible to diversify across asset class, company, industry, sector, country and even fund manager.

Diversification means you do not need to pick the performers each year!
 

 

AUS Property AUS International
Year End     Cash      Bonds    Trusts       Equity     Equities _____________________________________________________________________

30-Jun-97   6.77%   16.76%   29.29%   26.56%   29.11%  

30-Jun-98   5.11%   10.88%   10.21%   1.64%   42.68%

30-Jun-99  5.04%   3.28%     3.11%     15.34%   8.54%

30-Jun-00   5.58%   6.17%   16.62%   15.06%    24.17%

30-Jun-01   6.08% 7.42%   13.90%     9.11% -5.67%

30-Jun-02   4.66% 6.21%   14.85%     -4.54% -23.21%

30-Jun-03   4.97% 9.78%   12.15%     -1.61% -18.15%

30-Jun-04   5.30% 2.33%   17.24%     21.73% 19.90%

30-Jun-05   5.66% 7.93%   18.10%     26.03% 0.53%

30-Jun-06   5.76% 3.41%   18.05%     24.02% 20.44%

30-Jun-07   6.42% 3.99%   25.87%     29.21% 8.27%

30-Jun-08   7.25% 7.81%   -37.7%     -13.7% -21.3%

Note: ASX 300 Industrials was down 27%.

Source: Cash: UBS Warburg Bank Bill Index, Australian 90 Day Bank Accepted Bill; Australian Fixed Interest: UBS Warburg Composite Bond Index; Property: S&P/ASX 200 Property Trusts Accum Index, Australian Shares: S&P/ASX 300 Accumulation Index; International Shares: MSCI World ex Aust. Acc Index with Gross Div. reinvested (A$)

The table shows how returns vary widely between asset classes, and within a single asset class. You will also notice that the asset classes with the greatest positive returns are also the ones with the larger negative returns.
Peter Quinn B.Bus CA ACIM CFP FAICD
Director, Quinn Consultants
http://www.quinns.com.au/

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