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It Was a Bloodbath on the Sharemarket Today. Here’s a Shower of Common Sense.

You know that feeling you get when you sit down to watch a horror movie? Slightly apprehensive, every sense tingling and heart beating rapidly in your chest?

Now imagine you’re watching that same movie by yourself, in the dark, in a cabin in the woods. It’s storming outside. And then there’s a knock at the door…

You’d jump out of your skin, right?

Well, that’s exactly what’s happening on global sharemarkets at the moment.

In a nutshell, investors are worried we could be at the start of a financial horror movie, something akin to the crisis of 2009.

This means they are overreacting to any ‘knock at the door’ (in the form of unexpected news), and share prices are rising and falling much more sharply than usual.

Finance types refer to this phenomenon as volatility, and this week is a perfect example, with the ASX 200 rising 1.4 per cent yesterday before falling almost 4 per cent today to trade at multi-year lows.

During uncertain times, and particularly on days like this, anyone with a bit of skin in the investing game looks at the sea of red on their screen and wonders whether perhaps they’ve made a poor decision sticking their money in shares.

It’s a completely understandable reaction to the feeling of losing money (or worse, losing control of it). But is it justified?

When times are tough it’s more important than ever to think through why we’re putting our money at risk as investors. So let’s take a closer look at what’s going on.

Why are investors so nervous?

The overriding reason for this nervousness is uncertainty around global economic growth in the short to medium term.

Commodity prices have tumbled across the board. The United States is hamstrung by non-existent interest rates. Europe is struggling to maintain a functional union and China is very publicly slowing down (although how quickly it’s happening is anyone’s guess).

Meanwhile, back home in sunny Australia, our leaders are desperately trying to work out how to make money without digging it out of the ground, all while playing musical chairs with the country’s economic direction.

In the face of this, investors are worried that some catalyst, similar to the fall of Lehman Brothers in 2008, could trigger another financial crisis.

If that sounds a bit pessimistic, well, it is, but it’s only part of the story.

And although this is the point where most media beat ups about the sharemarket end (“$XX Billion Wiped From the Market, Panic Selling, Rout” scream the headlines on any down day), it’s worth stepping back and looking at the bigger picture.

So shares aren’t done for?

Probably not, if history has taught us anything (although we did cop a pasting today).

Last year, in the midst of another bout of market fear, we covered this chart from Fidelity Worldwide Investment showing the growth of $10,000 in the Australian sharemarket over thirty years. And while the numbers on it are now a year old, the point rings just as true today.

Sharemarket ASX 200 performance over time. Investment chart by Fidelity.

If you had invested $10,000 in Australian shares in June 1984, by June 2014 it would have grown to $283,830, an annual return of 11.8 per cent (assuming dividends were reinvested). The same investment in global shares would have yielded $157,127, or 9.6 per cent per annum.

That’s despite war, recession, the Asian currency crisis, the tech bubble and the global financial crisis. It just goes to show how resilient sharemarkets can be in the face of ongoing uncertainty.

As we said last year, “while there’s no guarantee that these gains will be repeated over the next 30 years – past performance is no indicator of future returns and all that – history shows us that over the long-term, investing in shares can be a highly effective strategy for building real wealth”.

What’s the bottom line?

All this is not to say go and put all of your money into shares right now; there’s no denying it’s risky out there.

But it’s equally important not to panic. Often the worst time to sell is when markets are gripped by fear and prices are deflated. In times like this, you’ve got to remember that investing is a long-term game.  

For those with iron guts, these fluctuations could even be an opportunity to buy good stocks on sale. 

As the legendary Warren Buffett famously said, the time to be fearful is when others are greedy, and the time to be greedy is when others are fearful. And if you were happy to buy strong, stable companies when the market was up at around 6000 points a few months ago, what’s changed to make you uncomfortable buying them at a better price today?

The decision on whether to buy, sell or hold is up to you, but remember, while markets can fall hard (they certainly did today), they do get up. You’ve got to learn to roll with the punches.