Why you shouldn’t panic when sharemarkets go down in value

If you’re like us, then your Twitter/LinkedIn/Facebook/Google feeds are being clogged with people telling you to GET OUT OF THE SHAREMARKETS NOW! But this is NOT the ideal action.

What Should You Do?

When you’re invested for the long term, the best course of action to these market hiccups is to ignore them completely.

If you’ve invested with Clover then you’re in it for the long-term so the answer is easy – ignore it!  The long-term impact this recent equity drop will have on your portfolio is negligible.

There’s a lot of talk about the rout in tech stocks and the biggest fall in the S&P 500 and Nasdaq indices since February. Fears of the ongoing trade war and its expected impact on company earnings means that we are likely to continue to see increased volatility in the markets in the near term. As we write this, the S&P 500 total return (in Australian dollars) is still over 23% from where it was a year ago.

Investing in sharemarkets is like riding a roller coaster with dizzying climbs and sudden drops. All the while you’re sitting there and everyone around you is screaming in delight or terror.

The point is, volatility is a normal part of sharemarket investing. Sharemarkets have historically delivered higher long-term returns than cash precisely because their short-term returns are so unpredictable. So don’t hit the panic button whenever things take a dip.

What about timing the market?

It can be tempting to try and time the market during periods of increased volatility. But if your objective is to grow your wealth over the long-term, cashing out while waiting for the volatility to subside or trying to time the rebound can be a very expensive exercise.

In fact we’ve written about this before where we highlighted that historically, if you missed the 20 best trading days over a 22 year period, then your end value would have been lower by 50% versus being fully invested over this period!

That’s because volatility in the sharemarket swings both ways –  big falls and big gains. When markets do start to recover, the biggest gains can often be in the initial phases of recovery. Missing those strong rebound days while sitting in cash can make a significant difference to long-term return outcomes.

Ok, so why are people concerned?

Unfortunately, many people forget (or don’t know) that volatility is actually the norm for the sharemarket and start freaking out when they see their investment values drop. They panic and tell their friends to do the same who then tell their friends to do the same and so on. Pretty soon, herd mentality takes over and like lemmings people follow the leader.

Exiting the sharemarket when things get bumpy may provide some short-term emotional relief, but in the longer-term you may end up taking a much higher toll on your financial wellbeing.

In investing you get compensated for bearing risk. If share returns were predictable they wouldn’t be risky, and if they weren’t risky there would be no reason why they should generate a higher long-term rate of return than safer investments like cash.

Remember, if you’re invested with Clover, the sharemarket is only one component of your portfolio, with your shares spread across not just the US and Australia, but in many sharemarkets throughout the world.

Depending on your portfolio you may also have exposure to Australian bonds, property and cash. These other components help to create the benefit of diversification, an investment approach that is at the core of all intelligent investing.

Plus, if you’re regularly contributing to your Clover portfolio, the occasional sharemarket breather can actually be beneficial, allowing you to take advantage of dollar cost averaging, essentially “buying more for the same cost”.

If you’d like to learn more about volatility and how it affects your investments check these posts (because this has happened before):

Why volatile markets separate true investors from the rest

Don’t let volatility Trump your investment plans

What impact would a trade war have on your portfolio?


Disclaimer

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