Successful investing can be really hard in times like the present. 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. While the weakness we are going through differs in detail from rough patches in the past, basic investment principles still apply.
Investing is not a linear journey
Market volatility on investments can be worrying. These drops can range from 5% to 20%, all the way up to 50% (like the financial crisis). The next graph demonstrates the range of emotions that investors may experience over an investment cycle. The danger of these emotions is the temptation to give in to them.
However, unless you are a short-term trader, you shouldn’t be overly concerned as these periodic share market falls are healthy and normal. These cycles are nothing new and will continue in the future with periods of contraction and growth.
The chart below gives us a look at the history of Australian shares with numerous stock market downturns but with constant corrections with long-term rising trend ultimately resuming.
Bear markets are the price we pay for the higher long-term returns from shares relative to cash and bonds. As an investor it’s important to recognise that stock market volatility is normal and can be very intense during uncertain economic climate like now (Ukraine War). Eventually they pass. It’s crucial that you don’t let these changes in the market, even the big ones, steer you off from your long-term strategy and always be in at a certain level.
Magic of Compound Interest
A wise man once said “Money makes money. And the money that money makes, makes money.” The sooner you start investing, the more your money will accumulate over the long-term.
The graph above shows the value of $1 invested in various Australian assets in 1900. That $1 would have grown to $243 if invested in cash, to $881 if invested in bonds and to $691,806 if invested in shares. The huge difference between the two at the end owes to the impact of compounding returns on top of returns.
The magic of compound interest with exposure to growth assets is an important factor to grow our wealth, but with that comes rough patches every so often. The earlier you open an investment account the sooner you can accelerate your savings.
Timing the Market is not easy
Why not try and time the market to avoid the shortfall or reinvest once uncertainty is removed. It’s hard to resist the temptation but unfortunately, trying to time the market is difficult.
Avoiding the market’s downs may mean missing out on the ups as well. The chart below demonstrates that 50% of the stock market’s best days occur during a bear market. If you missed the market’s 10 best days between 1992-2021, your returns would have been cut in half. And missing the best 30 days would have reduced your returns by an exorbitant amount of 83%.
In the long term, it’s almost always better to invest in stocks—even at the worst time each year—than not to invest at all. Sticking to a long-term strategy and avoiding impulsive decisions will lead to most desirable outcomes for investors.
Attractive Dividend Yields
Australian shares offer an attractive dividend yield. This will likely remain this way as companies tend to avoid cutting their dividend pay-out, as this will result in negative signalling to investors, in turn creating a fall in share price. As of recent these yields especially attractive against bank deposits as shown below
Turn down the noise
In a world where social media enables the rapid dissemination of news and noise, the overload of negative news is making us focus on the worries rather than our long-term strategy, leading to shorter investment horizons. We are rarely told of the billions that market rebounds and the rising long-term trend in share prices adds to the share market The key is to avoid the noise and your odds your success will increase immensely.
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