How To

The danger of being sidelined when markets start moving

Fri 28 Jan 22, 4:33pm (AEST)
sidelined

Share article

Key Points

  • Historical data shows that market corrections are normal
  • Despite the major market pullbacks in 2018 and 2020 the All Ords still averaged 12% per annum
  • The Australian share market has on average one negative year in every five

The surprise increase in the inflation rate, clearly forced the Federal Reserve (The Fed) to signal rate rises as early as March, and this together with concerns over the spread of omicron - plus risks Russia will invade the Ukraine - led to some cautious trading over the last week.

But despite the recent selloff, it’s important in times of doubt not to 'panic' yourself onto the sidelines.

What’s important to note from historical data is that market corrections are perfectly normal. When share pullbacks occur, they throw up rare opportunities for savvy investors to capitalise on.

The value of staying the course

Take for example the All Ordinaries Index (All Ords). Despite the volatility in both the three years between 2017 to 2019 as well as the three years between 2018 to 2020, both time periods have shown a positive return of 33% and 24% respectively.

This represents an average of 12% per annum growth despite the major market pullbacks in 2018 and 2020.

What these numbers clearly demonstrate is the value of sticking with markets, even when the going gets pretty hairy, and remaining true to your investment strategy, especially in times of severe volatility.

Four out of five isn’t bad

What the historical data also highlights is how normal it is for the Australian share market to have one negative year in every five.

But the good news is that markets do go up over the long term, which is further demonstrated when you look at a 10-year total return.

As of the 27th of January, the All Ords has seen a 4.48% total return over the past year, despite the more recent 11% pullback from its recent high.

As markets selloff due to macro reasons - as opposed to company specifics - it's always a good time to look for buying opportunities consistent with your investment goals.

For example, those stocks which you may have been watching, but felt were too expensive may now be worth buying - in light of the recent selloff - as you rebalance your portfolio.

The danger of being on the sidelines

Let's consider a hypothetical example of investing $10,000 in the All Ords over the past three years. What’s clearly evident over that timeframe are periods of large falls in the market.

But remember, over the same timeframe, the All Ords also witnessed a three-year annualised total return of 10.48%.

As a result, the initial investment of $10,000 would be worth $13,485 after the three years.

What these figures clearly illustrate is the danger of being spooked into selling down good stocks that may have fallen due no fault of their own.

Adding insult to injury, those who realise a loss by selling and then remain in cash, risk being on the sidelines when markets suddenly go up.

Admittedly investors with cash can jump back in any time they like, but all too often when they do so, most of the upside has already been factored back into the price.

All Ords

 

The All Ordinaries Index over five years tracked against the ASX200. Note the 200-day moving average.

Market Index acknowledges Bell Direct in the preparation of this article.

 

Written By

Mark Story

Editor

Mark is an investigative financial journalist and editor who started his career working for Marathon Oil in London. He has a degree in politics/economics and a diploma in journalism. Mark has worked on 70-plus newspapers and financial publications across Australia, NZ, the US, and Asia including: The Australian Financial Review, Money Magazine, Australian Property Investor and Finance Asia. Mark is passionate about improving the financial literacy of all Australians through the highest quality content. Email Mark at [email protected].

Get the latest news and media direct to your inbox

Sign up FREE