The share market has always been a volatile and unpredictable place. In recent months we saw the share market in Australia go from over 7000 points in the ASX to below 5000 points before rebounding back to over 6,000 as of the date of this article. What is important to remember when considering investing in the share market is that a long term approach reduces the impact of short term volatility. What a lot of people don’t remember is that it was only as recently as December 2018 (just over 18 months ago) that the share market dropped to 5,500 points before an incredibly strong 2019 took the market to over 7000. I’ve heard many comparisons of the recent volatility to the Global Financial Crisis in 2008 however the ASX dropped to below 3,500 at the time, a long way from where we are now.
What this highlights to me is the volatility that the market can go through in short periods of time however long term investing can greatly assist to reduce the impact of this. Speculating on the short term share market movements can be extremely difficult to predict, certainly on a consistent basis. Understanding how the markets will react to a second lockdown and also predicting the impact of any further stimulus may have on the markets is even harder. Will stimulus keep the market buoyant? Will the extra stimulus make the market nervous and decline? Has the market already made allowances for a second wave and extra stimulus and be seemingly unaffected from here. These are a handful of factors that are very difficult to predict when it comes to forecasting short term market movements. The market is also susceptible to many other global influences too so while a second wave domestically may or may not prompt additional stimulus there may be other driving forces that influence the market movements more significantly.
And so, whether you are already invested, or whether you are looking to invest the short term market movements should not impact your risk profile or your investment goals. The Share market is, and has always been a volatile and unpredictable place. Understanding and accepting this is an important part of choosing to invest in this asset class. Over the long term the Australian Share Market and Global Share markets have produced returns above many other asset classes however they have also experienced periods of relative underperformance in short periods of time. I strongly encourage investors to consider the risks of the portfolio and risk profile that they are considering, understand the highs and potential lows before committing to exposing funds to different asset classes. Once an investment decision is made, remember your investment goals and the target outcomes that you are aiming for. If you are unsure, speak to an investment adviser about your concerns and your risk profile however making changes to the risk profile and overall allocation to different asset classes can have significant impacts on your original goals.