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Hewison Private Wealth - Insights
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Sharemarket Volatility
asset class
market downturn

How will you feel when your asset falls 50%?

Andrew Hewison
Managing Director
21 Aug 2018

This is not click bait my friends. Whether it be domestic or international equities, property or cryptocurrency, history shows us that from time to time growth assets can, and will, experience large falls. So how do you sleep at night?

During a number of recent client conversations I have been asked how imminent another sharemarket correction (-20% fall) will be. This fear is typically derived from sensationalised media reports because as we all know, fear sells!

So, let’s look at some facts

From 1900-2016 the Australian sharemarket has risen in 81 of 117 years, as illustrated below:

years of sharemarket crash


Every now and again markets will suffer a negative year but not even the most astute investment manager knows which year this will occur.

And not all year negative years are catastrophic. The graph shows that a GFC event, where the All Ords fell by 40-50%, has occurred once in 117 years!

So what is more likely to occur?

Of the 22 negative years, the average fall was 12%. But when you combine the negative and positive years, an investor’s average return is 13.22% per annum. Furthermore, the market grew by around 8.5% per annum in 2017 and 2018.

Now that you have some context, when the market returns a negative year, how will it impact you?

Hewison financial advisers strongly believe in diversification. Diversification across asset classes, e.g. listed and unlisted Australian & International shares, fixed income, property and cash. Of course, the more you have invested in any one asset class, the more you will be impacted by changes to values (+/-) within that asset class.

Kate & Steve: a Case Study

  • Kate and Steve have a portfolio valued at $3.75m
  • 40% is invested in Australian shares, totalling $1,430,000
  • The total portfolio generates income of around $190,000 per annum, or 5%, (regardless of capital movements)

The following tables shows the capital impact of Australian share movements:

asset exposure table

Key Takeouts

  • Cash flow is king! Market movements generally do not impact the income and dividend distributions of investments. Often price movements do not relate to the underlying company performance.
  • Diversification matters. The extent of diversification depends on the goals and investment timeframe of the individual. If you can cope with volatility, over the long term a higher exposure to growth assets should result in higher returns. But then there’s the ‘sleep at night’ factor to consider, how much volatility can you handle?
  • Understand the facts. In this scenario a 20% sharemarket fall results in a -3% return due to the benefits of diversification and underlying cash flow.
  • Market downturns breed opportunity. If you are a long-term investor, often market declines present opportunities to invest in quality companies that have been unnecessarily dragged down by general market movements. This is a value add opportunity!
  • Stay Informed. Some media can be fear mongers. Market falls are a fact of life but do not need not be concerning. The true impact of a 20% fall in your portfolio may not be as drastic as some would have you believe.  

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.