Keeping a long-term view in times of volatility

Global financial market uncertainty has taken centre stage over the past few weeks.  So how can you stay focused on your long-term objectives?  

Sharemarket volatility has now become a part of our daily news headlines. Over the past few weeks we witnessed the US Congress passing the US$700b rescue package, the Australian Reserve Bank cutting interest rates by 1% in the largest single cut since 1992 and Kevin Rudd announcing the Government will guarantee $600-$700 billion deposits in Australian financial institutions. On 13 October the Australian sharemarket (S&P/ASX 300) gained 5.5% and the Dow Jones bounced 11.1%.

The Government’s responses followed the continuing losses and liquidity pressures being suffered by major American financial institutions. In September, Lehman Brothers announced it was filing for bankruptcy, while Merrill Lynch was purchased by Bank of America Corp., the largest US consumer bank for US$50 billion. This was followed by the US Federal Reserve announcing it would bail out the largest insurer worldwide, American International Group (AIG) with a US$85 billion loan.

While volatility and the daily news headlines can be a cause for concern, it is important to remember that even though market movements can be rather dramatic on a day-to-day basis, they generally follow long-term cycles, as illustrated in the charts below.

Time in the market reduces the chance of a negative outcome

Sharemarkets operate in cycles and after a strong five years of record performance Australian sharemarkets have now moved into the next phase. Markets will always fluctuate but the longer you stay invested, the less affected you are by short-term volatility, as illustrated below.

Source: All Ords Accum Index/S&P/ASX Accum. Index, simple average of monthly returns. Timeframe: 31/1/1988-31/7/2008.

The benefits of long-term investing

• Smooth the ride. Markets will always fluctuate but the longer you stay invested, the less affected you are by short-term volatility.
• Don’t miss the recovery. In many instances when investment markets recover they tend to bounce back quickly. Withdrawing from the market means you risk missing out on the best gains.
• Long-term rewards. Market volatility may lead to short-term downturns in your portfolio but history shows that markets will more than recover these losses over the long term.

For more information, visit www.ing.com.au/markets or contact your Financial Adviser.