The market downturn caused by the COVID-19 pandemic, where the Australian equity market fell by over 30% within a month, was one of the most severe in recent history, but it also proved to be one of the shortest-lived.
From a low point of around 4,816 points in March 2020, the ASX 200 has since recovered by almost 40% over the past 12 months. Not quite back to its most recent high point of 7,140 points in late February 2020, but a strong recovery, nonetheless.
Although the performance of the Australian Sharemarket and US Market can vary, throughout history both markets have trended in a similar direction. Therefore, investor lessons and experiences from these two markets are comparable over the long term.
Over the past 150 years, the US has experienced 18 bear markets, where stock prices have fallen by more than 20% or more from recent highs. This suggests, that on average, they occur once every 8 years.
So, although we know that bear markets will return in the future, we can rarely predict when they will occur, what the cause will be, or how long they will last. The only certainty, if history is any guide, is that markets always recover.
Obviously, this time last year we could not have known what was going to happen and, when markets are falling so dramatically, in such a short period of time, the natural reaction for many investors is to mitigate their losses and exit the market. Whenever I have had to discuss this option with clients, the question I pose is “If you sell now, at what point will you feel comfortable re-entering the market”.
Often, investors are only comfortable re-investing when markets have already recovered to their pre-correction levels. So, what has been gained? Further, you could be forced to sit on the sidelines indefinitely if you keep waiting for the right time to invest. In the current low-interest-rate environment, the opportunity cost of this is enormous.
Although painful, at the time, there are numerous lessons that can be learned from a market downturn to help you the next time one comes around, specifically:
There is no doubt that having a professional partner during these times certainly helps one stay true to these five important points.
(Image Source: Getty)
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 firstname.lastname@example.org or visit www.hewison.com.au
Please 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.