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The market went down

As the events have unfolded in the investment markets over the last 6 months, it is easy to question why you continue to invest in shares. Returns from shares have been negative. NZ shares were less negative than overseas shares, which were better than Australian shares, which were better than emerging markets, but they were all negative.

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But 6 months is a short period in the context of share markets and the last 6 months has been poor but not as bad as some of the previous 6 month periods.

 

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In times like this, some investors reflect on their tolerance for the volatility of shares. As a result, they contemplate a switch to cash, or cash and bonds. While such a change reduces the future volatility, it is also likely to reduce the future long-term return. This is because interest rates are currently low, as seen in Table 2 and there is not the same protection against inflation.

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Shifting to cash or bonds in the current environment reduces the volatility but locks in the loss from the last six months and makes the expected future return positive, but low.

Will the share markets stop falling?

With shares, it must be remembered:

  • Market down-turns have happened before and happen on a regular basis. It should not be a problem, provided the proportions of the shares in the portfolio were not bought with the intention of spending the money in the next few years.
  • In the past when falls have happened, the share market has ultimately recovered, but the recovery can take several years. It is a test of an investor's patience and willingness to take on volatility.

Chart 2 plots the movement of the global share markets since the start of the subprime debacle in 2007 and the resulting global financial crisis. The last 6 months must be looked at in the context of the last 4 years.

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In simple terms, since October 2007, global share markets are still down 28% but up 54% from the low in March 2009. This is a significant fall over a prolonged period and naturally creates a high level of uncertainty and concern. It is not known when the markets will stop falling, or return to the high of October 2007.

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The legal stuff
This article is a general investment commentary. It should not be considered as being personalised financial advice. Members should obtain appropriate financial advice from a suitably experienced Authorised Financial Advisor before making any investment decisions. Only an Authorised Financial Advisor can legally take into account the person's personal circumstances. SuperLife does not give personalised financial advice.