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Our investment partner, Vanguard Australia, has provided us with some timely insight on what a market downturn is, to provide some reassurance that whilst it isn’t good news to hear it isn’t world ending either.

What is a recession?

Put simply, a recession is two quarters (six months) of negative growth. This can lead to measurable levels of spending and investment declining, with a natural downward pressure of prices occurring as demand and gross domestic product overall decreases.

Understanding market downturns

Nearly everywhere you turn, from friends and colleagues to news channels, you can find someone with a strong opinion about the financial markets.  At the moment, it seems that the news on so many fronts is bad with skyrocketing energy costs and both equity and bond markets down significantly since the start of the calendar year.

While investing in the stock market is typically a prudent choice for investors seeking long-term growth, sharp drops can still be hard to stomach. Below are some things to keep in mind if a market tumble makes you feel the need to “do something.”

Downturns aren’t rare events

Typical investors, in all markets, will endure downturns during their lifetime.

A bear market is typically considered a decline of 20% or more, lasting at least two months. Since 1980 there have been nine instances of bear markets.

Dramatic market losses can sting, but it’s important to keep a long-term perspective and stay invested in order to participate in the recoveries that typically follow­ 

Some bear markets since 1980 have been sharp, but many bull market (a price increase of more than 20%) surges have been even more dramatic, and often longer, leaving stock investors well compensated over the long term for the risk they took on.

If you were to crystallize the losses in a bear market, such action would shut you out of the strong recoveries that have historically followed market downturns. The answer is to come up with a game plan before the next market pullback, so you’re well positioned to try to take advantage of the opportunities that follow. What’s more, you’ll probably know what to expect as markets cycle through their phases, so you can tune out messages that don’t help your strategy.

Timing the market is futile

The old adage “it’s not about timing the market, but about time in the market” has been proven true over the years.

The best and worst trading days often happen close together and occur irrespective of the overall market performance for the year. Research shows that those who stay invested over the long run in a well-diversified portfolio will generally do better than those who try to profit from turning points in the market.

 

From our perspective, whilst we know that these market events are inevitable, we understand that investing in the market can be a psychological rollercoaster at times for our clients. If you would like to book in a 10-minute phone call with your adviser to discuss your specific circumstances, please give the office a call on 03 6231 3448 to schedule a time to do so.