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Market volatility

Staying the course to reap the rewards – overcoming market fear

John Hewison
Founder and Director
18 Dec 2011

The market volatility over the past 12 months or so has been a nightmare for investors – and not too comforting for advisers either. We have seen mountains of cash accumulate in bank accounts and violent fluctuations in share prices in almost total defiance of fundamental performance values.

As usual, in times of market turmoil, we hear about ‘new world’ predictions and that historically proven fundamentals of investment valuation and performance have all changed and we have entered a new paradigm. Well I beg to differ.

We are hearing ‘long-term buy and hold doesn’t work anymore’, but buying and holding without portfolio rebalancing had never worked. By the same token, quality assets will always recover their value – so in essence, long term investing is alive and well.

We have had notions that the European Economic Union is going to collapse, the European banks are going to collapse and contagion will spread around the globe. Well no, that’s not quite the case either! The EEU and its members (apart from the UK) has made it abundantly clear via several initiatives that they are committed to the EEU, the Euro and they  committed to doing whatever it takes to fix the systemic fiscal problems in the region. But it is going to take a long time and making knee jerk reactions to the rumours and innuendo on a daily basis is absurd.

How the short sellers and hedge fund managers must be loving all this scrumptious volatility – anyone would start to wonder how much influence they are having on the markets themselves?

In any event, what does this mean for investors and how should they react?

Should they sell out and invest in cash? Given the falling interest rate environment and yields only barely beyond inflation, why not just dig a hole in the back yard and bury it?

What we need to do is get back to the basics of investment valuation101.

Take real estate for example, it is valued on a combination of capitalisation of rent and growth prospects based on location, improvement etc. So if the real estate market has a short term slump in value do you run out and sell your residence? I don’t think so.

Shares are primarily valued on the ratio of profit to the share value – price to earnings ratio or PE. All companies are valued this way, both private and publicly listed. Of course there can be other influences but let’s stick to the basics. So with many top quality Australian ‘blue chip’ companies trading at historically low PE ratios and generating extraordinary dividend yields, why would investors not jump at the chance to bolster their income and wait for the gains to be made from market recovery? The markets will recover; it’s just a matter of when.

What prevents many people from sticking to these basic principles is fear – fear of the unknown, fear of sensationist press and fear of losing their money. However, let’s be realists, is BHP, RIO or CBA going to go broke? I don’t think so! Is your prime real estate going to become worthless overnight? I highly doubt it! 

It’s important in these times that investors stick to the fundamental basics of investment evaluation; stick to the principles and disciplines of portfolio rebalancing; ignore the illogical preachers of doom; and reap the rewards – income in the short term and capital gain in the long term.


Hewison Private Wealth is a Melbourne based independent financial planning firm. Our financial advisers are highly qualified wealth managers and specialise in self managed super funds (SMSF), financial planning, retirement planning advice and investment portfolio management. If you would like to speak to a financial adviser on how you can secure your financial future please contact us 03 8548 4800, email info@hewison.com.au or visit www.hewison.com.auPlease note: The advice provided above is general information only and individuals should seek specialised advice from a qualified financial advisor. The views in this blog are those of the individual and may not represent the general opinion of the firm. Please contact Hewison Private Wealth for more information.