In recent months there have been fluctuations in investment markets – both in Australia and globally. While no one can predict exactly what will happen in the financial markets in the short term, it is important to remember that there will always be short term movements in the markets. Your investment strategy should aim to achieve longer term objectives and as such, it is important that this is where your focus lies.
Sharemarkets around the world witnessed changing dynamics over the past six months. In 2007, the Australian sharemarket^ established a series of record highs and despite some periods of volatility, achieved an impressive 16.1% return for the 2007 calendar year, while the world sharemarket* returned 4.9% in 2007, inclusive of dividends.
Recent market volatility was initially sparked from the effects of the “sub-prime” mortgage market in the US. This has subsequently extended into sharemarkets globally. Despite this recent market volatility, the Australian economy continues to remain strong. The outlook for consumer spending remains buoyed by sustained strength in the labour market, and the strong pace of economic growth in countries like China continues to support the resources sector.
Time in vs. timing the market
Importantly, market corrections like these occur from time to time and are part of the sharemarket’s normal cycle. While these can be a cause for concern, it is important to remember that even though market moves can be rather dramatic on a day-to-day basis, they do follow long-term cycles. The graph below illustrates this.
Timeframe: 01/01/83 – 31/12/07 Data: Australian shares – S&P/ASX 300 Accum. Index, International shares – MSCI World (ex-Aus) in $AUD, Listed Property – S&P/ASX 200 Prop Trust, Australian Fixed Interest: Commonwealth Bank Bond Index (Pre-Sept ‘89) / UBSA Composite Bond All Maturities Index (Post-Sept ‘89), Cash: 11am Cash Rate (Pre-Apr ‘87) / UBSA Bank Bill Index (Post-Apr ‘87) Source: Mercer, RBA, IRESS
As shown in the graph, all asset classes have provided positive returns over time. If an investor invested $10,000 into Australian shares in 1983 and reinvested their dividends, their investment would now be worth over $300,000 today. Australian shares have shown significant growth over the past four years achieving per annum returns of over 15% (as at 31 December each year).
During volatile times, some investors may begin to question their investment strategies, forgetting that investing in sharemarkets is a long term investment. Time in the market is important to ensuring you don’t miss out on market growth – rather than timing the market.
Mark Lowe
Tandem Financial Advice
www.tandemadvice.com.au