Why it pays to stay invested despite turmoil
THE world is facing challenging times, and as usual, I’m getting a raft of emails from people asking whether they should quit their investments before it’s too late.
The other question many ask is what effect the situation in the Ukraine may have on stock markets.
It is normal to feel apprehensive when the market has a downturn, especially when accompanied by the threat of war. I understand that. But I am comforted by the latest research from my long-term friend, Ashley Owen of Stanford Brown Private
Wealth. Ashley has analysed 27 military crises since the 1930s, including the German invasion of Poland that led to WWII, Pearl Harbour, the Korean War, Vietnam, the September 11 attacks, and several Russian military invasions and attacks. He traced share market reactions with a particular focus on US and Australian markets.
His conclusion is sudden military crises inevitably trigger abrupt selloffs in share markets, but almost all recover to above their pre-crisis levels within a few months.
The reason is military activities generally lead to increased demand, spending, company revenues and profits.
So they are positive for share markets – and especially Australia, since military activity leads to higher commodities prices.
The initial share selloffs are an understandable reaction to the shock of the event. But historically, military crises are buying opportunities for longterm investors.
It’s worth restating some fundamental investment principles.
1. The major factor that determines wealth is your rate of return. You will never get a decent return leaving money in the bank, so you need to move to assets such as shares, which historically have given the best returns. Because these assets offer liquidity, they are also volatile, which means regular, sometimes unexpected market movements.
2. You have to stay in the market. It’s tempting to cash out and wait for markets to rebound, but historically the bigger the fall, the bigger and faster the bounce-back. People who try to time the market usually miss the bounce and find themselves stranded.
3. Volatility is normal. The Australian share market has averaged 9 per cent a year (income and growth) over the last 120 years. In some years it may give you 15-20 per cent; in other years you may lose 10 per cent or more. That’s the nature of markets. But returns tend to even out over time.
4. The price of a share does not always reflect the value of the company. Some quality companies (like Sonic Health and Suncorp) have fallen around 10 per cent, yet their balance sheets are still in good shape and they should remain good businesses. This means sometimes you can pick up good shares at a discount.
5. Investment is a marathon, not a sprint. To quote Professor Paul Marsh of the London School of Business: “The long-run attractiveness of equities, in my view, is undiminished. You should take a long-term view, and the long run is at least 20 years. You should focus on time in the market, not on timing the market.”
It’s impossible to say exactly when the current market turbulence will settle but we can be confident the share market will recover – it always has done. Good quality companies making sustainable earnings and paying dividends should recover well.