Strategies that long-term investors use to ride the ups and downs of share market volatility.
It’s never an easy time for investors when the share market hits a pocket of turbulence. However like any sensible air traveller, the best advice for investors is to buckle up tight and avoid, the temptation to grab the parachute and bail.

Indeed, savvy long-term investors understand that short-term highs and lows (known as ‘market volatility’) are a natural part of the investment ride. For example, over the past 20 years, Australian shares have returned about 12.5 per cent annually. However, since 2004, investors have enjoyed an annual return of more than 26 per cent from shares. So, it’s only natural after a stellar run like this that a downturn would rumble along at some stage.

Despite the recent share market gyrations, the broader evidence suggests the economic fundamentals are still positive for Australia’s companies and global share markets. For instance, interest rates despite a few hiccups of late, are still relatively low and stable, while emerging economies such as Brazil, Russia, India and China will go on driving global growth. In fact, emerging markets, according to ipac research, have thundered along at an annual average of almost 29 per cent over the past three years. A lower Aussie dollar, in the wake of the correction, is also helpful news for local exporters.

But with the swings come the roundabouts. History shows time and again, assets that produce high long-term growth often experience short-term fluctuations in value. Sometimes, as we witnessed recently, these quality assets can fall in value. However, when the chips are down, the best thing to do is sit tight and let values recover. Fail to do this and the long-term impact on your wealth can be harsh.

ipac research shows that if an investor kept his or her money invested in the Australian share market for the 20 years to December 2006, before fees and taxes, they would have received an average return of 11.4% per annum. However, if the same investor missed 10 of the best trading days during this period, the return drops to 9.0% per annum. Miss the top 40 days and the returns drop to just 5.3% per annum.

Similarly, another research group, DALBAR Inc. found that the average investor in US share funds achieved a return of 3.9% per annum over the 20 year period 1986 to 2005. This was despite the fact that the funds they were invested in returned 11.9% per annum. Why? It appears investors tried to time the market and, in switching their funds in and out at the wrong time, they simply missed the best days.

Apart from demonstrating the benefits of sticking with professional investment management and advice, the upshot of these studies is that it is normally best practice to accept that short-term ‘ups and downs’ are part and parcel of share market investing. And whatever you do, listen to the advice of your financial adviser and stay focused and committed to your long-term investment strategy.

If you’d like more information on your investment needs, give ipac a call on 1800 626 881 today to arrange a no-obligation appointment with a professional financial adviser.