Markets have been on a rough ride as investors assess the implications of the coronavirus outbreak. Our Chief Investment Officer David Macri talks about the benefits of taking a long-term view.
News of record share market falls along with ‘doom and gloom’ headlines can be unsettling for the most seasoned of investors. Many investors are responding to falling stock prices by selling their holdings and moving into ‘safe haven’ assets like cash or fixed income.
In times like these, it’s easy to forget that investing in the stock market is a long-term proposition. There will be ups and downs – and yes, there will be crashes – but over a longer period shares have performed better than most other asset classes. During heightened market volatility investors are reminded that the possibility of future returns carries with it downside risk. It is important that investors remain focused on their long-term objectives. Investing in risky assets such as equities always carries risk, and that’s why the recommended time horizon is usually at least 5 to 7 years. The reason for that is to allow investors to ‘ride out’ volatile times.
As the below chart of the Australian All Ordinaries Accumulation Index shows, when you zoom out to a longer time period historical crashes like 1987 and 2002 start to look like blips. And while the GFC may still be fresh in the minds of some investors, it is evident that remaining invested would still have ‘paid dividends’.
So why do people sell their shares in times like these? One reason might be that they’re trying to ‘time the market’. In other words, they’re hoping they can sell before the next stock market fall happens – only to buy back in once the market has ‘bottomed out’. However, there are numerous studies that show most investors do not benefit from market timing. Part of the reason is that investors likely miss out on the recovery which can generate substantial performance in the immediate aftermath of a sell off (which also comes with heightened volatility).
Focusing on the long term is the best way for investors to ride out market volatility and achieve their investment objectives.