20 Jan How to survive a share market correction
With the Australian Share Market having taken a tumble in recent weeks it is normal for new investors to get nervous. The more seasoned members of the investment community see this as an opportunity. Lets look at the strategies that have worked for our clients over the last 28 years.
1. Stay Positive
Your initial decision to invest in the share market is still a great decision. We need to maintain our long term focus on investing. Share markets around the world will act differently commensurate with the economic conditions in the respective country. There shall always be volatility. Stay focused and stick with your decision to invest for the longer term.
2. Add additional Funds
If you have additional funds, this volatility creates opportunity. When investors panic and sell this forces prices down. You see, the stock market is a balance of supply and demand. When there is panic selling you have more sellers than buyers. When markets are looking promising you have less sellers than buyers and markets go up. Panic selling by other investors presents an opportunity. Talk to your adviser and see if adding to your investment position is wise.
3. Individual shares versus Exchange Traded Funds (ETF’s)
AN ETF is a pre-selected basket of shares, it is one stock that invests in many different shares.This decision on whether to buy a direct share or a basket of shares is in line with the amount of investment risk and volatility you are prepared to accept. If you want to invest in the share market and limit the amount of risk (through diversification) , you can invest into exchange traded funds. If you are prepared to take on some additional investment risk, you can purchase individual shares. This requires extra skills to reduce your investment risk.
4. Selling and investing to cash.
If you panic and cash in your share portfolio, this can mean lower investment returns in cash, and a loss of capital. You need to consider the opportunity that shall be lost if you sell your shares prematurely. You are locking in a loss. Any recovery in the share price would have been lost as to access to franked dividends as you have now locked in your loss. On the flip side, you will not experience any further capital loss on your money. Instead, you would now be subject to bank interest. Bank interest rates in recent months have generally been below 3% (for 6 month term deposit rates which is the most commonly chosen time period for WRS clients). There is also no capital growth associated with bank interest. Of all asset classes since 1 January 1950, fixed interest has been the poorest performer.
5. In retirement – Pension Phase
You may not have any additional capital to invest when you are in retirement. But can you really afford to cash in your share portfolio and invest in cash based investments and continue to enjoy your retirement? After all, retirement is about living off a combination of income and capital from your pension fund investments. On average a blue chip share shall produce between 4%-5% per annum in dividends. These figures fluctuate and can be higher or lower depending on profit of the company. Franking credits are also available with certain stocks so this can add another 1% to the income received on your equity portfolio if you are 100% in pension phase of your superannuation account. Whilst the dividend rate is not guaranteed it is one of the key reasons many investors buy shares in the first place. If you redeem your share portfolio and invest to cash, your income return will be linked to bank interest, which is currently for the most part below 3% (this references the 6 month term deposit rates which are the most commonly chosen term we see in WRS for term deposits). This represents a huge difference in your retirement income. Wouldn’t you agree a higher income with some volatility in capital is better than a greatly lower income in retirement and the capital being guaranteed?
Stock markets represent liquidity. You have access to the market cash value of your investments within 3 days for listed securities. The value of your shares are changing every second in line with supply and demand. More buyers, higher price, less buyers lower price. The same liquid benefit of a share is also the same reason that it fluctuates. But those companies you are investing in, are companies where you may be doing your banking, buying your groceries or using their telco services. For those companies it is business as usual.
Markets shall go up and markets shall go down, nothing has changed, this is how it has been forever in the share market. This will pass, recover and move on over time. What we cannot answer is exactly how long it shall take to recover but history has shown us that it does recover. Maintain the long term outlook.
Disclaimer: The information provided in this blog has been provided as general advice only. We have not considered your personal financial circumstances, needs or objectives. Not all will be suited to an equity portfolio and there are a multitude of other factors you need to consider before making a final decision. Most importantly, seek advice from a licensed professional financial adviser before making any decisions.