This week has seen very high volatility in the equity markets and I wanted to take the time to write to provide some reassurance in regard to your investment or retirement planning. The market volatility is a direct result of the rapid spread of the Coronavirus (COVID-19) and the perceived direct impact of the virus on the world economic growth forecasts.
How Are the Markets Actually Performing?
Firstly, it is important to consider some context here in regard to the impact on the major markets. As I write this note the Australian All Ordinaries Index sits at around 6,500 points. One year ago to the day the index sat at 6,250, or around 4% lower. This, of course, excludes the 3-5% dividend income (not including franking credits) that the Australian market has generated over this time.
If we consider the largest world market (the US) the total gain has been higher still over the last 12 months.
To be clear then, at this point, every dollar across the broad Australian market has generated a total of approximately 7-9% for the year. Of course, as I write the market continues to fall and may indeed fall considerably further from this point, but I think it is important to provide an overall market context to you first.
The next factor to consider is how you are invested – that is your risk profile – which looks at defensive versus growth assets. This is a very important discussion that we have with our clients as part of the advice process, as we need to consider the following factors:
- The ability of defensive asset classes (e.g. cash & bonds) to be inversely correlated to growth classes. This means that in volatile times for growth assets, defensive assets will typically show improvement. This often provides a downside cushion but equally provides a cap on performance when markets boom.
- Your life stage: i.e. when you may be considering drawing on your investments and the level of drawdown expected over the coming 7-10 years.
How Will This Effect My Investment?
I want to reassure our current clients that your own investment risk profiling has been carefully and deliberately set relative to your own situation and plans and that this has translated into the investments and mix that you now hold.
This is extremely important because it means that you will not need to sell assets to fund your lifestyle needs within the timescale where markets have always (historically over 120 years) recovered their upward trending. It goes without saying, but I will say it regardless, that we never want to sell any investment at a loss. A notional loss is not real until it is crystallised by selling.
The All Ordinaries performance over the last 120 years shows that the average annual return for the entire period is a staggering 13.1%. That’s despite the great depression and the global financial crisis during this time. Even more important, the worst performing decade over the period has delivered 8.2% annually!
You may indeed argue that the growth in the last 18 months before this latest volatility had been unsustainable and that asset values were over inflated. Regardless, history tells us that given time markets will recover to and beyond those heights.
Finally, it is of course, always worth considering buying when markets are volatile, whether this be via contributions or savings.
Baldwin Financial Services is based in Prospect in the northern suburbs of Adelaide.
Contact us to find out how we may be able to help you.