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Why I’m not worried about a 10% share market correction

Nathan Lear
Partner/Private Client Adviser
13 Dec 2018

The Australian share market has fallen around 12% from its recent high in August this year. It’s human nature for us to worry about such falls, after all, as humans, we have evolved to worry. Studies show that we feel losses twice as much as gains, we are becoming less and less inclined to stop and smell the roses.

Firstly, I will admit, if you are invested in shares, it’s never nice to see the value of your portfolio worth less on paper. But remember, it’s just that, on paper. If you don’t sell, you don’t lose.

A 10% fall in the share market is not uncommon. Over the last 10 years, the sharemarket has had several 10% corrections, even with the overall market trending upwards over this period. If you can’t handle a 10% correction in the sharemarket, perhaps you need to ask yourself the question – Should I be invested in this asset class?

Volatility can be your friend in the form of a buying opportunity. Lower prices mean you can buy a company share at a lower price than it was yesterday. It sounds so simple, yet so many people fail to take action when market falls, as the fear sets in.

Think of the falling share price of a quality company like an item at the shops that you want to buy that is on sale. Think back to the Black Friday sales a few weeks ago. If an item that you have been wanting to buy was on sale (10% to 15% cheaper) would you be more inclined to purchase? Of course you would. The same rationale should apply to how you think about shares.

So why am I not worried?

  • I understand that corrections are normal. For many investors, the hardest thing is dealing with their own emotions. Share markets are driven by fear and greed, the next two points demonstrate how you can take your emotion out of the equation.
  • I have a diversified portfolio. A diversified portfolio lowers volatility and helps to smooth your investment returns. The extent of the diversification depends on the goals and investment timeframe of the individual(s). For example, a portfolio that is 100% invested in the sharemarket will fall or rise in line with the sharemarket. However, in theory, a portfolio invested 50% in shares and 50% in fixed income for example would only fall in capital by half compared to the broader share market.
  • I have a strategy. When the market falls, I won’t be thrown into chaos. I can call on cash or fixed income in my portfolio to buy more shares. This will benefit me in the long run when prices recover. We call this portfolio rebalancing. Rebalancing your portfolio will give you a natural buy low, sell high approach and remove the emotion of when to buy and sell.
  • I have a long-term investment time horizon. History shows us that the sharemarket rises approximately 80% of the time. If I remain invested for long enough, I can ride out the shorter-term volatility (such as we are experiencing now) and I will capture this growth.
  • I shut out the market noise.  Although I like to stay informed, I don’t let outside opinions influence my portfolio decisions. I have a strategy in place and this strategy will dictate when I make changes to my portfolio.
  • My portfolio generates income. Shares pay dividends. If the market falls 10% there is no reason why companies should cut their dividends by 10%. Income is especially important for our retiree clients. Even if they see their portfolio marked down due to market volatility, they can continue to live off the portfolio’s income.

How does my view compare to yours? If you feel like you need a recalibration on your approach or want to know how to go about investing in uncertain times, it’s time to Book a Discovery Meeting with an Independent Hewison Private Wealth Financial Adviser.

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.