Investor confidence in a market downturn
Monday 18 May 20
Investment markets have had quite a ride this year. While many have had their focus on how to manage social distancing and other challenges, some are also concerned about what's happening to their superannuation or other investments.
The above graph shows the plunge that we had a short while ago. Amusement parks and roller coasters may have shut down, but a drop like that can find the tummy relocated to a place where it doesn't belong.
Fortunately, it appears to have hit bottom and levelled off:
There are several points regarding this that I'm sharing with my clients:
- The plunge in late February through to near the end of March was dramatic, and it had a significant impact upon your investments, but your investments did much better than what happened to the market.
- While the Australian market is down 25% from the peak, you can see it hit bottom, then ease up and level off. My expectation is that this is what the market feels is the current value of the businesses in the market, based on the reduced earnings that they are experiencing now, and the amount of time it is going to take to get them fully performing again.
So, the question is then, where will it go from here?
- In the short term we can expect both ups and downs. I’m not expecting anything terrible, and I don’t expect it to get as low as what it was in late March. What I am very confident in is full recovery over the next couple of years and ongoing growth. That means higher than average growth during that recovery period.
- During this period of time I am also expecting a big difference between high and low performance companies. Some will be extremely successful and others will be pretty miserable. That’s where actively managed funds can make a big difference. For those of you with those actively managed funds, your investment portfolio has the potential to perform much better than the average of the market shown in the graph. We have seen that on the way down. I expect to continue to see that on the way back up.
If you were retiring today we would have a significant challenge. But given that you are making contributions and seeking long term growth, this is one of the best things that could happen to your portfolio. You are able to buy in at very low prices, and you have the time for them to recover and deliver tremendous value.