Market fall not sign to sell
AUSTRALIAN shares have taken a solid tumble in recent weeks but unless you particularly need the money, it’s not a cue to sell.
The leading Australian sharemarket index, the ASX 200, on Friday (October 10) was down to about 5210. That’s down from about 5625 at the end of August - though still above (just) the index value of 5190 at the start of the year.
Though nothing to be too happy about, the current market reversal is not a cause for panic. Seasoned investors know that sharemarkets have, historically, always recovered from dips - often reaching new highs over time.
The key bit of information you need to know is, over the past 100 years, the Australian sharemarket has averaged a return of about 10 percent per annum. That’s more than inflation, and at that level, you will grow wealth over time if you remain invested. Over the shorter term however, you can see your capital shrink.
Market highs and lows, often referred as “volatility”, are a natural part of sharemarket behaviour. Individual share prices can also be quite volatile regardless of broader market movements, and that’s because when you invest in shares you are buying into a business. No enterprise experiences consistently rising revenues and profits and an improving business market year after year. Just like households, businesses face a variety of challenges on a daily, monthly and annual basis and these can be reflected in share price movements.
That’s why it’s so important to consider the nature of the business you are buying into as part of the stock selection process. It’s always worth looking for companies with good management, a viable, long-term market (especially in our rapidly evolving digital age) and a clear plan for generating growth.
If you’re looking to invest in shares that represent prosperous, well run companies – something I recommend, the current sharemarket dip can represent a good buying opportunity.
Meanwhile, Medibank Private is being listed on the sharemarket in December 2014. If you’re interested, read the prospectus (available later this month).
Paul Clitheroe is a founding director of financial planning firm ipac, Chairman of the Australian Government Financial Literacy Board and chief commentator for Money Magazine.