Should I stay or should I go?

When investing in volatile markets, sometimes it is difficult to emotionally manage the volatility, especially when they happen in such a dramatic way as the recent share market drop.

Since April 2015 the ASX, along with other major world markets, has dropped approximately 15%, with an 8.5% of this drop occurring since 05.08.2015.

The reason for this big drop is many, and these are just a few of the reasons:
• geopolitical issues,
• the performance and future anticipated performance of major economies of the world such as China, USA and Eurozone;
• performance of our local economy,
• currencies values,
• commodities prices,
• anticipation of any movement regarding Interest rates, and
• many other reasons beyond the scope of this article.

The major questions in the mind of most investors, regarding all or some of the above issues is:
“Should we get out and wait to recover and get in again?”

Or

“Should we just stay put, and try to ride the wave?”

There are some fundamental issues that makes answering the question quite difficult and it depends on the Individual’s long term strategy, risk tolerance, risk appetite and point of view about the market.

First you should ask yourself – “what is the time frame of the investment?” Is it long term or medium term?

It is important to put things into perspective. You see the share market as volatile because it is reported on everyday in the news. Imagine if the value of your home was reported on everyday also… The slowing of the Chinese economy will also flow through to real estate in Australia, how will it affect the price of your property? Maybe you don’t mind as you are going to live there for another 40 years, or maybe you are preparing to sell and now your property is worth 5% less than one month ago. This same philosophy should be taken with the equity market.

If the investor’s time frame is a long term frame, then usually they remain in the market during the market peaks and troughs receiving the dividends, rebalancing the portfolios after a major peak or a through. They make sure that their shares are fundamentally sound and worthwhile in their portfolio, also these troughs in the market provide great buying opportunities.

If the investor’s time frame is shorter to a medium time frame, then may need to consider a more active approach in managing potential capital loss. One way is to consider at the time of the initial investment at what level they need to get out if the shares hit a predetermine level after a major drop ( to have a stop loss), and then at what level they will come back into the market, in anticipation of recovery. In this case many investors or decision makers use ‘fundamental’ analysis to purchase shares and sell the shares based on two main reasons, first the fundamentals changed and not applicable any more or purely due to some price action based on maximum loss we want to tolerate or other ‘technical analysis’ as the price behaviour of the particular share. The investor also needs to have a re-entry point, so he/she do not miss the recovery after a strong sell off period

A wise man once said to me “I became wealthy because I gave time to my investments to mature, just like a good bottle of wine; but I always checked the bottle, checked the cork and monitored the conditions surrounding the bottle to ensure they remained appropriate”

Please contact us if you want to review your equity portfolio or to start an equity investment portfolio. We are certified financial advisors and accountants in Liverpool with over 35 years’ experience meaning we hold deep understanding of the financial planning process integrated with tax effective strategies.

Dimitri Argyros | Director | S&Y Private Wealth