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Market volatility: An overview

Many investors become concerned when volatility occurs in global financial markets – particularly about the impact on their super balance and other investments. In times like these, it’s important to understand the causes of market movements and how to minimise risk.

Why do markets fluctuate?

Markets are influenced by many things – industrial, economic, political and social factors can all have an impact. For example, consumer and business confidence can both affect spending and therefore company profits. And of course, natural disasters can cause major damage to any economy with no warning. During times of market volatility, it’s important to remember one of the fundamental principles of investing – markets move in cycles.

What is the effect of market movements on investment returns?

The table below shows the effect of market volatility on different asset classes for 6 months and 1, 3, 5, 10 and 20-year periods. Looking closely, we can see that even though some asset classes have shown negative results over shorter periods, over 20 years, returns across all asset classes are positive.

What is the effect of market volatility on super funds?

When markets are volatile, your super balance may decline, but it is important to remember that markets move in cycles. Volatility is a natural part of the economic cycle. Markets are influenced by a range of factors and are inherently unpredictable. The Australian Securities & Investments Commission’s (ASIC) MoneySmart say’s ‘Don’t panic if the short-term returns are negative: remember that super is a long-term investment’.1 History demonstrates that over the long term, the general trend of share markets has been upward.

ASSET CLASS RETURNS AS AT 31 DECEMBER 2019

Asset class

 6 months
 1 year
 3 years 5 years 10 years 20 years
Australian Shares 3.28% 23.77% 10.33% 9.07% 7.77% 8.34%
Global Shares 8.95% 27.86% 13.69% 12.10% 12.20% 4.13%
Australian Property Securities -0.05% 19.36% 9.10% 10.93% 11.55% 7.73%
Australian Fixed Interest 0.63% 7.26% 5.14% 4.18% 5.74% 6.10%
International Fixed Interest 1.11% 6.60% 3.93% 4.09% 6.07% 6.96%
Cash 0.52% 1.50% 1.72% 1.91% 2.87% 4.24%
Global Property 6.93% 23.06% 9.31% 6.53% 9.25% 9.23%
Global Resources 5.26% 27.87% 15.56% 11.10% 1.38% 7.54%
Global Emerging Markets 6.91% 18.60% 12.68% 8.87% 6.26% N/A
Global Listed Infrastructure 5.11% 24.19% 11.82% 10.06% 12.11% N/A

Source: S&P/ASX 300 Accumulation Index, (ASX All Ordinaries Accumulation Index pre December 2000), MSCI World Net Index ($A), S&P/ASX 200 Property Accumulation Index (ASX Property Trusts Accumulation Index pre December 2000), Bloomberg Australian Composite Bond Index 0+ Years, Citigroup World Government Bond Index ex Australia AUD Hedged, Bloomberg AusBond Bank Bill Index, FTSE EPRA/NAREIT Global Developed Index, HSBC Global Mining Accumulation Index, MSCI Emerging Markets Net Index,FTSE Global Core Infrastructure 50/50 Index - AUD hedged (UBS Global 50-50 Infrastructure & Utilities Net TR Index -AUD hedged pre December 2015). Past performance is no indication of future performance.

Are my investments safe?

When share market’s experience volatility it’s only natural to feel concerned about how fluctuations may impact your investments. Below are some points to consider when it comes to your investments:

  • Keep in mind the bigger picture

    Super is a long-term investment. Shares, which usually form a large part of most balanced super accounts, are also generally a long-term investment. They are designed to provide capital growth over a period of five years or more. Think in years, not days. The timeframe for super may be 20 years or more, so short-term volatility shouldn’t diminish the long-term potential of your investments. Growth assets (such as shares) tend to fluctuate in the short term, but have historically provided excellent returns for investors over the long term.

     

    When share markets fall in value, it may be tempting to sell up. However, trying to time the market by selling now and buying back later is a risky strategy that rarely results in investors coming out ahead. By taking a long-term view of investing, you can ride out any short-term fluctuations in the market and take advantage of growth opportunities over the long term.

  • Diversification

    Diversifying your investments is one of the most helpful ways of managing volatility in your portfolio. Your investment may benefit by being spread across a variety of asset classes, including shares (domestic and global), fixed income, cash, direct and listed property and alternatives. This diversification should help soften the effects of any share markets falls as some asset classes often tend to do well whilst others are struggling. Also, spreading your assets around means you are less reliant on any one asset class at any particular time.

  • Understand your risk profile

    All investments carry some risk. How much risk you’re willing to accept will be influenced by your financial situation, family considerations, time horizon and even your personality. If market volatility has caused you to reassess the way you feel about risk, it’s important that you speak to a financial adviser to discuss any necessary changes to your financial plan.

  • Understanding the implications of withdrawing your money

    Before you withdraw from an investment you should understand the implications, risks and costs involved.

    • Crystallising losses. If the value of your investment is falling, you are technically only making a loss on paper. A rise in prices could soon return your investment to profit without you doing anything. Selling your investment makes any losses real and irreversible.
    • Incurring capital gains tax (CGT). Make sure you know what your CGT position will be before selling any asset.
    • Losing the benefits of compounding. If you’re thinking about making a partial withdrawal from an investment, remember that it’s not just the withdrawal you lose, but all future earnings and interest on that amount.

Key takeaways

  • Super is a long-term investment designed to generate sufficient money so you can enjoy your retirement.
  • Diversification is an important part of a long-term super investment strategy. To create the lifestyle you want in retirement, it may be necessary to invest in growth assets like shares so that your returns stay ahead of tax and inflation.
  • It may be beneficial to ride out the bad times in order to achieve long-term growth.
  • Your financial plan was designed exclusively for you to suit your investment objectives and risk profile. It’s important to stay focused on your long-term goals.
  • If you have a financial adviser, they can be invaluable in this process as they can review your situation and provide further guidance. Alternatively if you don’t have an adviser we can help, so please call us on 13 13 36.  

How we can help

Talk to your financial adviser, call us on 13 13 36 or visit our market updates page for the latest information.

1. ASIC’s MoneySmart Super Decisions, July 2018, pg 20. https://static.moneysmart.gov.au/files/publications/super-decisions.pdf

 

 

Taxation considerations are general and based on present taxation laws and may be subject to change. You should seek independent, professional tax advice before making any decision based on this information. Colonial First State is also not a registered tax (financial) adviser under the Tax Agent Services Act 2009 and you should seek tax advice from a registered tax agent or a registered tax (financial) adviser if you intend to rely on this information to satisfy the liabilities or obligations or claim entitlements that arise, or could arise, under a taxation law.

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Disclaimer

This document has been prepared by Colonial First State Investments Limited ABN 98 002 348 352, AFSL 232468 (CFSIL). The information, opinions, and commentary contained in this document have been sourced from Global Markets Research, a division of Commonwealth Bank of Australia ABN 48 123 123 124 AFSL 234945 (CBA). Global Markets Research has given CFSIL its permission to reproduce its information, opinions, and commentary contained in this document and for CFSIL to authorise third parties to reproduce this document. This document has been prepared for general information purposes only and is intended to provide a summary of the subject matter covered. It does not purport to be comprehensive or to give advice. The views expressed are the views of CFSIL at the time of writing and may change over time. This document does not constitute an offer, invitation, investment recommendation or inducement to acquire, hold, vary, or dispose of any financial products. CFSIL is a wholly owned subsidiary of CBA. CFSIL is the issuer of super, pension and investment products. CBA and its subsidiaries do not guarantee the performance of CFSIL products or the repayment of capital for investments. This document may include general advice but does not take into account your individual objectives, financial situation or needs. The Target Market Determinations (TMD) for our financial products can be found at www.cfs.com.au/tmd and include a description of who a financial product is appropriate for. You should read the relevant Product Disclosure Statement (PDS) and Financial Services Guide (FSG) carefully and assess whether the information is appropriate for you and consider talking to a financial adviser before making an investment decision. The PDS and FSG can be obtained from www.cfs.com.au or by calling us on 13 13 36. Past performance is no indication of future performance. Stocks mentioned are for illustrative purposes only and are not recommendations to you to buy sell or hold these stocks. This document cannot be used or copied in whole or part without CFSIL’s express written consent.