Market downturns, like this one, are to be expected
It's been awhile since there's been a drop in the markets as sharp, broad and sudden as last week's.
A recap of where we stand
US markets fell 3.1% (as measured by the Standard and Poor's 500 Index), on Wednesday, followed by greater declines in Asia. The impact to European markets was more muted. The S&P 500 was down an additional 2.06% on Thursday. The Australian sharemarket wasn't immune, falling some 2.7% during Thursday's trading day.
What's behind the rout?
After an extended period of relative calm and steady market gains, we're entering a period when investor sentiment is getting shakier. Geopolitical tensions between the US and China are ratcheting higher, nervousness is increasing about the approaching US corporate earnings season and US interest rates are climbing.
Taking a step back for some perspective
It's important to remember that corrections and bear markets happen often. From 1980 through 2017, there were 11 market corrections and eight bear markets in global stocks. That means on average there's been one attention-grabbing downturn every two years.
Another lesson from history is that stock market sell-offs related to geopolitical events have often been short-lived.
Some of the investor angst may be related to the belief that rising interest rates are a harbinger of poor stock returns. The reasoning goes that higher rates make bonds relatively more attractive compared with stocks and that they put a brake on economic growth, which in turn weighs on corporate profits. Vanguard research, however, suggests otherwise. We looked at 11 periods of rising rates over the past 50 years and found that stock market returns were positive in all but one of them. In addition, those periods together produced an average annualised return of roughly 10%—not a performance to be feared.
High stock valuations have been a concern as well, especially since the start of 2018. The recent market decline, in that context, is a sign that valuations are moving closer to fair value—a healthy adjustment that leaves more room for upside.
Advice for weathering the markets' ups and downs
Staying informed about market events is prudent, but so is maintaining a long-term view. Investors who already have a sensible investment plan designed to carry them through good markets and bad will hopefully have the discipline and perspective to remain committed to it despite this downturn.
Doing so will probably result in better investment outcomes than giving in to the temptation many investors may have right now to head for the exits. Market timing rarely turns out well, as the best and worst days often happen close to each other. In many cases, timing the market for reentry simply results in selling low and buying high.
Even with the latest market pain, patient investors with broadly diversified portfolios who rebalance and keep an eye on investment costs are likely to be rewarded over the next decade with fair inflation-adjusted returns.
16 October 2018
vanguardinvestments.com.au
Hot Issues
- Vaccination rates as they happen around the world
- Approaching the dawn
- Videos and other resources for our clients
- Retirement the ‘number one trigger’ for financial advice
- ‘Unfinished superannuation business’ to watch for in 2021
- Superannuation ideas for 2021
- Retirees need new super investment approach
- Returning expats reminded on tax snares with pensions, investments
- 2020 is coming to an end. Phew!!
- ATO flags key deadlines for early release of super
- Retirement costs rising despite COVID impacts
- Government targets fund expenditure, best interests in new super reforms
- Small SMSFs develop rapidly
- Investing basics for first timers
- Behind the dash in new market listings
- Super, death, and taxes
- What millennials are thinking about investing and retirement
- Capital preservation front of mind for SMSF returns
- Comprehensive list of COVID-19 initiatives and packages.
- Most SMSFs are still poorly diversified
- Related party purchases must be clean
- How your coming tax cut could pay off
- Majority of retirees expected to fall short on retirement savings
- Monitoring super performance critical in light of new measures
- Budget 2020 - A very comprehensive break down.
- Budget 2020 - Fact Sheets
- Budget 2020 - At a Glance, Overview, Outlook
- JobKeeper extension – changes implemented
Article archive
- October - December 2020
- July - September 2020
- April - June 2020
- January - March 2020
- October - December 2019
- July - September 2019
- April - June 2019
- January - March 2019
- October - December 2018
- July - September 2018
- April - June 2018
- January - March 2018
- October - December 2017
- July - September 2017
- April - June 2017
- January - March 2017
- October - December 2016
- July - September 2016
- April - June 2016
- January - March 2016
- October - December 2015
- July - September 2015
- April - June 2015
October - December 2018 archive
- Ranking of the world's best: Taking it personally
- The value of advice - Behavioural Coaching
- Our Advent calendar for 2018
- Compliance, tax advice in strongest demand from SMSFs
- Stop!! Don't do a paper Budget, use our online budgeting tools instead.
- Franking credit policy to dent retirement savings by 15 per cent
- Information needed to be the BBQ expert.
- Hungry for income? Choose carefully.
- Retiree self-protection: A volatility-and-downturn 'bucket'
- How financial advice helps create wealth.
- Superannuation gender gap narrowing, research shows
- All the stats you need to see how Australia is going.
- Market downturns, like this one, are to be expected
- ATO claws back $850m in unpaid SG in FY 17-18
- ‘Hefty penalties’ with TRIS payment failures, SMSFs warned
- The global financial crisis: Behind us but far from over
- 'Huge' professional risk in SG delays, big four firm warns
- What a financial adviser can add to your portfolio's returns.
- ATO updates crypto guidance
- Reverse mortgages: Short-term gain, long-term pain
- ATO set sights on 27,000 funds in ongoing crackdown
- ATO zones in on hundreds of newly created reserves
- A dynamic approach to retiree spending and drawdowns
- Your investment freedom-maker