This article by Anthony Keane appeared in The Advertiser on 29th October 2020.
A big drop in Aussie shares is the latest in a volatile pandemic. Here’s how to handle the rollercoaster ride.
Investors should brace for a wild ride in the coming days and weeks because of the US election, but it’s nothing they haven’t already seen this year.
The pandemic created extreme volatility, with Aussie shares plunging 37 per cent during March’s COVID crash before spending the next seven months recovering almost two-thirds of their losses.
Whatever happens in the Trump-Biden battle and the rest of this pandemic, investors and super fund members should avoid kneejerk reactions, investment specialists say.
Online investment group Six Park’s head of distribution, Ted Richards, says short-term market movements aren’t always rational.
“Remind yourself that short-term volatility is very unlikely to affect your ability to achieve your long-term investment goal,” he says.
“If you are someone that doesn’t like risk and uncertainty, this needs to be reflected within your investments.
“If you think a crash of 30 per cent or more could lead you to selling out of your investments then it’s likely your investment strategy won’t pass the sleep test and you’re taking on too much risk.”
Richards says investors wanting to cope with volatility should:
• Write
• Invest according to their risk profile.
• Diversify across different assets including shares and property, and also geographically in Australia and overseas.
“A suitably diversified portfolio can help smooth out the volatility and prevent the stress that can occur if you’ve put all your eggs in the one basket,” he says.
CreationWealth senior financial adviser Andrew Zbik says investors should understand their risk tolerance, avoid panicking and stick to their asset allocation.
Zbik likens investments to a rollercoaster, where the investor chooses how bumpy the rollercoaster is, and then must ride it.
“The biggest mistake people make is they choose a rollercoaster that’s right for them but when the going gets tough they do the irrational thing and sell, de-risking and missing out on the recovery,” he says. Sharemarkets have become more volatile, with wild swings on the same day, and it’s not just driven by human emotions of fear and greed.
“The volatility is a lot more extreme than previous cycles because the majority of trades are now done by computers,” Zbik says.
“It’s not humans – it’s computer algorithms driving it. We can’t compete against that.”
Zbik says volatility in the coming weeks could depend on how presidential power is transferred, and there are concerns it may not go smoothly.
“There’s plenty of research that shows irrespective of who wins an election, markets tend to rally, he says.
“But the caveat is a smooth transition to power. I never thought we would be talking about this with the United States.”
US instability would send “shockwaves around the world” but investors should stick with their asset mix if it reflects their tolerance to risk, Zbik says.
AMP Capital head of investment strategy Shane Oliver says investors should “turn down the noise” while keeping their investment strategy relatively simple and focused on the long term.
“The trouble is that the digital world we live in is seeing an explosion in information and opinions about economies and investments,” he says.
“Recognise that it’s normal for markets to swing from one extreme to another. Focus on only a few reliable news services.”
BEFORE INVESTING IN A PANDEMIC …
Ask these questions:
1 What are your goals and investment horizon?
2 Are you affected by emotions such as FOMO?
3 Can you sleep at night if markets fall sharply?
4 How much experience and time do you have to dedicate to investing?
5 Will you be an active investor, or take a passive approach using index funds and exchange traded funds?
6 Do you need help from advisers, books and podcasts?
Source: Six Park