Four lessons from the market
Fri Feb 15 2008Since 2000, investment markets have weathered a variety of conditions - from volatility to stability, then recovery and volatility again. These changes have left many people wondering what the best way is to approach their investments.
Don’t panic
Many people may be tempted to move their money out of the share market during times of volatility or weakness. But it’s important to remember that markets move in cycles. Peaks and troughs are an intrinsic part of investing. While the cycle is unpredictable, history has shown us that recoveries always follow downturns, and vice versa. If you move out of the market, then you won’t be there for the recovery, which can sometimes arrive unexpectedly and take off quickly. The 1990s provided a period of stability and sustainable growth for investors, yet by the end of the decade, a series of events that were largely unpredictable had taken their toll on investment markets. The ‘tech-crash’, September 11, corporate corruption, the global economic slowdown, and the war in Iraq all contributed to volatile conditions in the markets. From 2003 the global economy started its recovery and conditions stabilised, giving markets the opportunity to respond favourably. At the beginning of 2007 the ASX was 83.1% higher than it was at its highest point in the 1990s (source: Reserve Bank of Australia). By the middle of 2007 however, concerns over sub prime lending in the US had sent shock waves through stock markets across the world. The Australian share market lost nearly 15 per cent between the high reached in July and low reached in mid-August, but by the end of August had bounced back to pre July levels. Many commentators are now calling that period of volatility a “market correction”. Throughout any market cycle, those people who hold their nerve, who remain focused on their long term goals and resist making snap decisions, are likely to be the winners.
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