Investment markets move in cycles

While negative returns are unsettling, they are a normal part of the investment cycle.  If you have invested to achieve higher returns, it’s normal to expect periods of negative returns along the way. As a general rule, the greater the expected returns, the higher the risk of a negative return.  Historically, for investors with a balanced investment risk profile, a diversified portfolio invested in shares, fixed interest securities, property and cash are likely to have a negative return once every five years.

Chance of negative return – this chart shows you how often you can expect to receive a negative return based on investment profile.

More recently, negative returns were experienced in 1987 as mentioned above, 1990 (recession), 1994 (bond crash) and 2001-3 (terrorist attacks, “tech wreck”). 

To see the impact of various “crises” in perspective you can view the Australian share market from 1900 to March 2008 and US share market from 1900 to March 2008.

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Withdrawing after a negative return may cause you to realise your losses

Once you withdraw your investment the loss will have been realised. Transferring the funds to a cash type investment may look attractive today, but historically investors who have held their investment during periods of market volatility have tended to perform better than those who have withdrawn their funds and invested in cash

Short term volatility can be less significant when your investment is viewed over a longer time frame.The impact of recent market volatility for the ASX 200 price index of Australian Shares up to 31 January 2008 can be viewed from a:

• one year perspective. 
• 3 year perspective
• 5 year perspective

Historically, growth assets such as shares and property have outperformed defensive assets such as fixed interest and cash over the longer term. Click here to see how the different asset classes have performed historically over time.

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Having a long term investment strategy helps keep you focused on your financial goals

It’s important to have a long term strategy you are comfortable with, that balances your attitude to investment risks and returns. This should position you well to ride out any short-term fluctuations in the market.  As part of a long term investment strategy it’s worth considering:

• Dollar cost averaging – Investing a regular amount at regular intervals can help you to average out your purchase price over time.  Click here to see how this can work over time purchasing at different unit prices. What this means is that when prices are down, you will buy more units for your money and when prices are up you will buy fewer units for the same amount, but over time, your average cost of purchasing may be reduced.
• Compound returns - Investing for the long term helps you make the most of the power of compounding. Holding an investment over time gives you the opportunity to achieve earnings on earlier earnings that have not been distributed.
• Timing the market - Some investors confuse “TIME IN” with “TIMING” the market. They try and pick the highs and lows, or when to get in and out. For many investors, trying to time the market actually results in lower longer term returns. This is illustrated by the “missing the 10 best months” graph. By trying to time the market, you may find that you miss a strong period of growth and therefore may not achieve the same result as someone who had got in and stayed in. Shares, like other growth assets, tend to provide you with a bumpy ride, but the potential rewards of sticking to your long term investment strategy can be higher. As you can see, historically shares have had superior performance to cash over the long term.

• Buying opportunities – for some, lower unit prices represent an opportunity to increase their investment.

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Frequently Asked Questions