Navigating Market Volatility: Six Lessons for Investors
This content was sourced from Vanguard - Five years on: Key investment lessons from market volatility | Vanguard Australia Personal Investor
Share market investors often etch significant trading events into their memory
Take last month, for example. Many investors will remember that it marked the five-year anniversary since the 2020 COVID crash, when global share markets fell more than 35% over the space of just a few weeks.
For many other investors though, the COVID crash, while traumatic at the time, is now ancient history. After all, five years ago is a long time in investment terms.
The Australian share market measured by the S&P/ASX 300 Index is now trading over 80% higher than its COVID low point of 4,359.60 reached on 23 March, 2020.
Likewise, the United States’ share market, measured by the S&P 500 Index, is up over 100% from the same timestamp half a decade ago.
So, what does this fading investment memory tell us, especially in light of the latest heightened share market volatility being experienced this year?
Here are six timeless investing lessons:
Stay invested for the long term: Those who avoided the temptation to sell their shareholdings during February/March 2020 and who stayed invested during the crash saw significant gains as the market quickly rebounded. This underscores the importance of maintaining a long-term perspective and not reacting impulsively to short-term market downturns.
Always have a plan: Investing without a plan is an error that invites other errors, such as chasing performance, market-timing, or reacting to market “noise.” Such temptations multiply during downturns, as investors looking to protect their portfolios seek quick fixes.
Stock markets are not the economy: Despite the severe economic downturn brought about by the COVID-19 pandemic, share markets began to recover very quickly. In fact, it was one of the shortest share market downturns in history. This highlights that stock prices reflect future expectations rather than current economic conditions.
Diversification is crucial: A well-diversified portfolio can help mitigate risks. During the COVID crash, different sectors and asset classes performed differently, and investors with diversified investments were better protected than those with portfolios highly concentrated in certain market sectors.
Share markets recover: Shares are renowned for being more volatile than other asset classes, however they have typically delivered the best returns over longer-term periods. Check out the Vanguard Index Chart covering 30 years of share market history. Whilst past performance should not be considered as an indicator of future performance, it shows that share markets invariably recovered their lost ground over time, so the best strategy is always to stay on your course, irrespective of sudden market jolts.
Emergency funds are essential: The sudden economic impact of the pandemic re-emphasised the need for investors to have an emergency fund available to cover unexpected expenses without having to liquidate investments at a loss.
Taking heed of these lessons can help you better navigate future market volatility and economic uncertainties.
Disclaimer
Vanguard Investments Australia Ltd (ABN 72 072 881 086 / AFS Licence 227263) is the product issuer and the Operator of Vanguard Personal Investor. We have not taken your objectives, financial situation or needs into account when preparing this material so it may not be applicable to the particular situation you are considering. You should consider your objectives, financial situation or needs, and the product disclosure documents for any financial product we make available before making any investment decision. Before you make any financial decision regarding Vanguard financial products, you should seek professional advice from a suitably qualified adviser. A copy of the Target Market Determinations (TMD) for Vanguard's financial products can be obtained at vanguard.com.au free of charge and include a description of who the financial product is appropriate for. You should refer to the TMD before making any investment decisions. You can access our IDPS Guide, PDSs Prospectus and TMD at vanguard.com.au or by calling 1300 655 101. Past performance information is given for illustrative purposes only and should not be relied upon as, and is not, an indication of future performance. This material was prepared in good faith and we accept no liability for any errors or omissions.
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