Learn from history’s lessons
THE coronavirus outbreak puts us firmly in extraordinary times.
Mass lockdowns, social distancing and a widespread health threat are all new to us. But there is nothing new about volatility in investment markets.
Spending time bunkered at home, I took to researching previous market downturns.
It turns out there have been plenty over the past century, probably more than many people realise.
Fortunately, the years of positive returns have far outnumbered - and outweighed - the down years.
Even so, if you drew a line graph of sharemarket movements over the past 100 hundred years, it would resemble a profile of the Himalayas, with plenty of ups and downs.
The difference is that with sharemarkets the long-term trend is progressively upward. Indeed, the outcomes of past market routs offer three important takeouts for investors.
1. Don't sell at the bottom
When we hear day after day about falls in share values, it's extremely tempting to sell out.
In fact, it can take nerves of steel to hang in. But hanging in makes a lot of sense.
COVID-19 may be a new bug, but since 2000 we've seen a number of serious viral outbreaks.
SARS (2002), MERS (2012) and swine flu (2009) have each had a negative impact on global equity markets.
But once the virus subsided - as it did in every case, markets took off. The catch is that to enjoy the lion's share of the gains, you had to be in the market.
2. Consider portfolio rebalancing
It may seem counterintuitive but now can be a good time to rebalance your portfolio.
Rebalancing means selling one type of investment and buying others so that you maintain your preferred weightings across different asset classes.
This ensures that your portfolio continues to reflect your goals and tolerance for risk.
Let's not gild the lily. Australian shares have dropped 22 per cent in the past month.
Red ink has been spilt across the market, and while some sectors have fared better than others, it's likely that your asset allocation is completely out of whack.
3. Embrace dollar-cost averaging
The beauty of rebalancing is that it encourages us to buy low and sell high, and shares and exchange-traded funds (ETFs) are offering exceptional value right now.
It's understandable that you may not feel confident tipping a chunk of cash into the market at present.
The solution can be dollar-cost averaging - steadily drip-feeding your money into the market by investing a set amount each fortnight, month or quarter.
It's a great way to hedge your portfolio against market ups and downs.
As always, watch the fees you're paying on your investments.
This is one aspect of your portfolio you have complete control over regardless of market conditions.
- Paul Clitheroe is chairman of InvestSMART, chairman of the Australian Government Financial Literacy Board and chief commentator for Money Magazine.