It’s Déjà Vu All Over Again

Yes it’s that time again. Time to relive a scene that’s played out with annoying regularity. The one where skittish financial markets combine with an eyeball-chasing media to help the nervous transfer their future wealth to the patient.

Once again the headlines are screaming about financial disaster and impending doom. “Aussie stock market slumps after US-China trade war prompts Wall Street plunge” cried one earlier this week, while “Wall Street slumps as yuan slide intensifies trade fears” shrieked another.

These headlines are designed to grab your attention. That is, after all, the whole purpose of eye-catching headlines; the more dramatic they are the more likely you are to be drawn to them. And the more sales, subscriptions and ad revenue generated. Very possibly at the expense of investors who will be spooked into taking short-term, reactive, action to their long-term financial detriment.

This Time is Different, Right?

Let’s examine this latest share market ‘rout’. Yes, the US had a tough session on Wall Street earlier this week.  The cause? Increasing trade tensions between the US and China as each plays a ‘tit-for-tat’ game of economic brinkmanship.  The US threatened to increase the range of trade tariffs on Chinese imports, and China retaliated by adjusting its currency lower to make its exports relatively cheaper. Cue a share market reaction, with US stocks falling around 3 per cent in one particularly torrid session.

But wait, haven’t we been here before? In October last year, as US-China trade relations came under strain, one media outlet led with “Australian share market sheds $52b following Wall St slump overnight”, while “Dow Jones slides more than 800 points in worst day for eight months” shrieked another.

There would, no doubt, have been investors who read those headlines and assumed the worst; that the increased volatility signalled the start of an extended share market slump. Some would have headed for the exits; abandoning their plans to invest for the long term. If so, it would have been to their financial detriment.

While the US and Australian share markets did experience heightened volatility towards the end of 2018 they have since comfortably recovered and, in both cases, recently gone on to post all-time highs prior to this week’s events. Those who sold then would have effectively transferred all those gains to investors who were able to sit tight through the discomfort.

Investing is a Marathon, Don’t Treat it Like a Sprint

There’s a saying that there are only two states in share markets; all-time highs and corrections. If you can’t handle the occasional correction you’re never going to benefit from the growth of companies that drive share markets ever higher over the long-term.

This, then, is the fundamental nature of investing to grow your wealth.  The surest path to long-term wealth creation is to invest early and often, keep your focus locked onto your future goals and your eyes and ears averted from the noise-makers. They have their own agenda to fulfil in readership and subscriptions. Let them run their race, you run yours.

Successful investing, as with much in life, is really about sustained effort and discipline. It isn’t even in the foregone spending that you’ve instead directed into investing. The real discipline occurs when markets get bumpy because, sure as night follows day, your resolve will be tested by the market gods from time to time.

The Power of Staying Put

What exactly are the rewards that the patient investor gains over the nervous one?

When it comes to investing the saying “you’ve got to be in it to win it” rings true. While it might feel less emotionally taxing at the time, selling and parking your money in cash when markets get volatile is a great way to sabotage your longer-term welfare.

As we pointed out in a blog post last year, just a handful of trading days can account for the majority of the return from your investment programme. No-one knows which particular days these will be so you’re going to have to hold your nerve through the occasional bad ones to get the ones that count.

The difference between remaining invested and missing out on just a handful of good days can be significant. And because good days often follow bad ones in times of heightened volatility, investors need to remain calmly invested to reap the rewards that share market investing can bring in the longer-term.

That, to be fair, is easier said than done. If it were easy fewer people would panic sell when bad news breaks. Which in turn would make share markets less volatile. Which would reduce the risk of investing in shares. Which would in turn reduce the returns that should be expected from owning shares, given their newfound predictability. Which in turn…. you see where this is going?

The higher return from the share market compared to other asset classes exists precisely because of the unpredictable nature of share prices in the short-term. No occasional emotional pain, no long-term gain.

Keep Calm, Diversify and Carry On

Let’s cut to the chase. Occasional bouts of share market volatility are a feature, not a bug, of share market investing. Always have been, always will be. Being able to deal with them is the price of admission every successful investor has to pay to reap the rewards available from the share market over the longer-term.

If (to paraphrase a certain Rudyard Kipling poem) you can keep your head while others around you are losing theirs, you will have developed an investing superpower, one that will enable you to extract the full measure of the returns available to all from the share market but attainable by the surprisingly few.