The first time an investor experiences sharemarket volatility can be a tense one. The media's talking doom and gloom and everywhere, it seems, people are panicking. It's only natural that some people want to cash-out their growth investments for fear of losing more money - but taking the time to pause and think before reacting is well worth it.
Have your investment goals changed?
The important thing to think about is your investment strategy. Are your goals long term? Are you aiming for capital growth? Or has security become a priority? If your strategy hasn't changed then think carefully before you change your investments and talk to an experienced adviser - it could be your smartest move right now.
Also, keep in mind the fact that market volatility is not new or unusual - markets work in cycles and periods of downturn occur. However historically, over time the Australian sharemarket has always returned to previous levels and even surpassed them.
Timing is everything
Another thing to consider is that you may be selling your investments at a bad time. In an ideal world, you wouldn't sell your home if its value had just fallen right before a market recovery - other investments are similar. Sure, it may seem logical to cut your losses and sell when the market is going down, but it might not be the best move. By selling your investment you are realising your loss, and you'll lose the opportunity for your investment to recover in value.
Think years, not days
Trying to time your entry or exit into an investment portfolio is a risky business, so the best idea is simply not to worry about the day you invest or sell and focus on the years you invest in. In the 10 years to 31 July 2008, the annualised return for the S&P/ASX All Ordinaries Accumulation Index was 10.7% pa. If you remove the five best performing days in the share market over that period that return drops to 8.5% pa. Remove the best 30 days and the return drops to just 2% pa.
No one could predict when those best days were going to occur so the only way you could take advantage of them was to be invested in the market for the full 10 years.
Investors who have had the courage to remain invested during previous downturns have been rewarded with any upside that has followed. Before you make any major decisions, think through the issues and get some financial advice.
For more information, call your financial adviser or visit colonialfirststate.com.au
Remember this is general advice only and does not take into account any of your personal circumstances or individual situation. Think about whether it applies to you and consider talking to an adviser. Past performance is no indication of future performance. Colonial First State Investments Limited ABN 98 002 348 352, AFS Licence 232468.