Market Volatility Frequently Asked Questions
- Why has my investment fallen? (and what is AMP doing about it?)
- How does market volatility affect my unit price?
- I’m finding current market volatility a bit stressful. Is this normal?
- What can I do to protect my investment against market volatility?
- What are growth assets and defensive assets?
- I’m a conservative/balanced investor, why has my account fallen?
- I’m invested in SuperCash, why did I get a negative return?
- Should I sell or switch my investment?
- Should I switch to cash?
- I’m retired and I’m concerned I’m drawing down my capital
- Is now a good time to invest?
Q1. Why has my investment fallen (and what is AMP doing about it)?
Firstly, it’s important to recognise that recent negative returns are industry wide. Most investment options have been negatively affected by recent market volatility. This has followed a number of years of consistently good returns for many of these options.
While negative returns are unsettling, they are a normal part of the investment cycle. Investment options suited to aggressive investor profiles are likely to have had a higher negative return when compared to more conservative investments. Conversely, these more aggressively invested options are also likely to have performed relatively well over the past 5 years when share markets were experiencing good returns.
This is because aggressively invested options have a high exposure to growth assets such as property, Australian and international shares than more conservatively invested options. In recent months these assets have tended to fall in value. It is also worth noting that even some defensive assets, such as bonds, have experienced negative returns over this same period, and this has affected the performance of conservative investment options.
When considering the recent performance of your chosen investment option(s), it is important to keep in mind that while unsettling, negative returns are part of the normal investment cycle. It’s also important to look at the investment option’s performance over time and in relation to its strategy and risk profile.
AMP takes an active approach to selecting, monitoring and managing our investment options and investment mangers to ensure the range of investment options we offer continues to suit investor needs.
We regularly monitor investment options and investment managers and from time to time we many change options or managers if we feel they no longer suit the needs of our investors.
It’s also worth noting that as part of our monitoring, we aim to ensure that our investment options remain “true to label”. For example, a Balanced fund has an indicative allocation of 70% growth assets and 30% defensive assets, and the manager is expected to manage the fund within the asset ranges permitted. So, even if the manager expects growth assets to fall in value and wants to allocate towards defensive assets, by doing this they won’t remain true to label.
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Q2. How does market volatility affect my unit price?
If the value of the assets owned by the investment option rises (as we have experienced in recent years) or falls (as we have been experiencing is the past few months), the investment option’s unit price is also likely to experience a rise or fall.
Both positive and negative returns are a normal part of the investment market cycle.
Remember, unit prices for Flexible Lifetime – Investments options also fall after an income distribution is paid.
AMP Capital Investors Limited ABN 59 001 777 591, AFSL No. 232497 is the responsible entity of the investment options in Flexible Lifetime – Investments. A Product Disclosure Statement is available from AMP or your financial planner and should be considered in making any decision about any investment options in Flexible Lifetime - Investments.
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Q3. I’m finding current market volatility a bit stressful. Is this normal?
It’s normal to be concerned when your account balance falls. After enjoying what may have been solid investment growth of your investment over recent years, it can be quite unsettling to now see your investment growing at a slower rate or even falling in value.
A number of books have been written and studies undertaken to understand the emotional side of investing when compared to investment returns. The illustration below depicts the ‘roller coaster of investor emotion’.
While switching to defensive assets such as cash may make sleeping at night easier after (and during) periods of weakness, it's likely to achieve lower long-term returns. Remember: market volatility is normal and stick to your long term strategy (don’t be thrown off course by your emotions). Click here to see the roller coaster of investor emotion.
| Where are you on the roller coaster? |
Q4. What can I do to protect my investment against market volatility?
Different asset sectors and different diversified fund categories have different levels of volatility. Usually, the higher the expected return the higher the potential volatility.
If you have selected investments that have higher expected returns, then a higher level of volatility is to be expected and there is not much you can do once a period of volatility has commenced.
AMP’s Investments in focus flyer sets out a number of things to bear in mind in times of market volatility. The most important things to remember are:
- stay calm
- find out the facts and stay informed,
- keep in mind your investment strategy and timeframe and
- if you need to, get professional financial advice from a financial planner.
This flyer also contains some useful tips on how you can manage investment risk, such as diversification, regular investing, and reviewing your attitude to risks and returns.
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Q5. What are growth assets and what are defensive assets?
Generally, growth assets are investments made with the objective of achieving an investment return (including capital growth and income) that outperforms inflation. Growth assets include: Australian shares, international shares, property and alternative assets.
Defensive assets are investments made with the objective of achieving more stable returns than growth asset investments, with little or no capital growth. Defensive assets include: cash and fixed interest.
Over the longer term, investments in growth assets generally provide a higher return than those in defensive assets. The below table provides the suggested minimum investment timeframe for each asset class.
| Asset class |
Asset type |
Suggested min |
| Cash |
Defensive asset |
No minimum |
| Fixed interest |
Defensive asset |
2 to 3 years |
| Property |
Growth asset |
5 to 7 years |
| Australian shares |
Growth asset |
7 to 10+ years |
| International shares |
Growth asset |
7 to 10+years |
A diversified investment will typically invest within and across a number of the different asset classes to reduce the overall risk. Diversification generally reduces the likelihood of any single investment or asset adversely affecting the value of your investment portfolio. However, you should realise that the value of your investment, including a diversified investment, can fall or may not perform in line with your expectations.
The mix between investments in growth assets and defensive assets will depend on your attitude to risk and your investment timeframe. You need to strike a comfortable balance between the level of risk you are prepared to accept and your desired level of return.
For example:
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The AMP Balanced Growth is a diversified investment option invested in a range of assets, including cash, fixed interest, property and shares.
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Source: Flexible Lifetime – Investments PDS part 2, page 21, issued 1 July 2007.
To find out what types of assets your investment option invests in, refer to your product’s:
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Investment Choices Catalogue (part 2 of the Product Disclosure Statement) for Flexible Lifetime – Super, Flexible Lifetime – Allocated Pension, Flexible Lifetime – Investments, SignatureSuper and CustomSuper.
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Investment Report or Annual Report – for all other pension and investment linked products.
AMP Capital Investors Limited ABN 59 001 777 591, AFSL No. 232497 is the responsible entity of the investment options in Flexible Lifetime – Investments.
AMP Superannuation Limited ABN 31 008 414 104, AFSL 233060 and RSE Licence No L0000550 is the issuer of Flexible Lifetime – Super, Flexible Lifetime – Allocated Pension, SignatureSuper and CustomSuper.
A Product Disclosure Statement is available from AMP or your financial planner and should be considered in making any decision about any investment options.
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Q6. I’m a conservative/balanced investor, why has my account fallen?
Unless you are invested in a product that is 100% capital guaranteed (generally these products have low returns which are in line with the risk), or are invested in a term deposit, chances are your investment will experience some volatility.
Even investors who selected diversified conservative or balanced funds as a way of reducing investment risk have been affected by the recent market volatility. This is because most asset classes have been affected in one way or another, including Australian and international shares, property and fixed interest.
Typically “conservative” funds invest in some growth and mainly defensive assets (eg: 30% growth assets, 70% defensive assets). This mix of assets is designed to provide a lower level of volatility over time, but with an expectation of lower returns.
In comparison “balanced” funds typically invest in growth assets and some defensive assets (eg: 70% growth assets, 30% defensive assets). This mix of assets is designed to provide a moderate return overtime, in exchange for a greater level of volatility.
Volatility is normal, and depending upon what type of investor you are (and what investment strategy you have chosen) you should expect negative returns one year out of every 4 (for an “aggressive” investment) to one year out of every 9 (for a “conservative” investment).
Chance of negative return – this chart shows you how often you can expect to receive a negative return based on investment profile.
For example the AMP Conservative and AMP Balanced Growth funds are available on many of AMP's products, such as Flexible Lifetime – Super (FLS). As you can see in the below chart, over the period 1 July 2007 to 31 March 2008, the AMP Conservative fund was down 2.3% and the AMP Balanced Growth fund was down 7.7%. While there are signs of improvement, given the level of volatility in investment markets, it is likely that many investors’ annual statements will show negative returns for the year ending 30 June 2008.
But remember, volatility is not all bad – it works both ways. On the plus side, a feature of the volatility over recent years is investors have received strong returns on their investments compared to assets such as cash. The strong growth in the AMP Balanced Growth fund from 1991 until 31 March 2008 can be seen in the following chart.
The recent negative returns are part of the normal investment cycle.
Past performance is not a reliable indicator of future performance.
Flexible Lifetime – Super is issued by AMP Superannuation Limited, ABN 31 008 414 104, AFSL 233060. A Product Disclosure Statement is available from AMP or your financial planner and should be considered in making any decision about the product.
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Q7. I’m invested in AMP SuperCash, why did I get a negative net rate of investment return?
The following chart shows the investment return for AMP SuperCash based on an initial investment of $1,000 (available in Flexible Lifetime – Super and Flexible Lifetime – Allocated Pension) since it was launched in May 2007.
As you can see, the investment option’s return has remained positive for this time.
The net rate of investment return shown on your statement (or Personal Rate of return on My Portfolio) is different to an individual investment option’s (eg AMP SuperCash) performance.
Each investor’s net rate of investment return will vary depending upon the transactions they have made.
Your net rate of investment return is calculated using your opening, closing and change in value figures for all your investment options. It then takes into account any transactions you have made such as contributions/withdrawals and their timing.
Even if your selected investment options have performed well during the period, your net rate of investment return may be negative (eg if withdrawals have been made).
Flexible Lifetime – Super and Flexible Lifetime – Allocated Pension are issued by AMP Superannuation Limited, ABN 31 008 414 104, AFSL 233060. A Product Disclosure Statement is available from AMP or your financial planner and should be considered in making any decision about the product.
Past performance is not a reliable indicator of future performance.
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Q8. Should I sell or switch my investment?
In considering whether to sell or switch your investment there are a number of things you should consider:
- Remember your investment timeframe
The following chart shows the suggested minimum investment timeframe depending on your risk profile. Your risk profile is simply your attitude to risk. You need to strike a comfortable balance between the level of risk you are prepared to accept and your desired level of return. Your attitude to risk will determine which funds suit your needs, as will your objectives and the timeframe you intend to invest.
| Where are you now in terms of the suggested minimum investment timeframe for your selected investment options? |
- Withdrawing after a negative return may cause you to realise a loss
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.
It’s important to realise that over a shorter time frame, such as one year, market volatility can seem quite dramatic. However, short term volatility can be less significant when viewed over a longer time frame such as 3 and 5 years. The following charts show the impact of recent market volatility for the ASX 200 price index of Australian Shares up to 31 January 2008. By
taking a step back you can see the volatility from a:
Past performance is not a reliable indicator of future performance.
- Consider the power of compounding
One of the most important points in accumulating wealth is to allow your investment to grow through generating earnings on earlier earnings. This is known as compounding. By starting investing early, adding to your investment (if you can) and holding your investment over time, you maximise your opportunity for compound returns.
If you sell or switch your investments, you’ll lose the effect of compounding and may lock in losses.
- “time in” the market not “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 long 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 significantly higher than sticking with cash. As you can see, historically shares have had superior performance to cash over the long term.
Past performance is not a reliable indicator of future performance.
- Market volatility is ‘normal’
Investment markets rise and fall over time. As a general rule, the greater the expected returns, the higher the risk of a negative return. Historically, diversified portfolios invested in shares, fixed interest securities, property and cash are likely to have a negative return once every five years or so.
It’s important to recognise that while no one likes to see their investment portfolio fall in value, negative returns are the price we have to pay for accessing the higher returns that growth assets provide over time. While switching to cash may make sleeping at night easier after (and during) periods of weakness, it's likely to result in lower long term returns. As an investor it is important to remember that market volatility is normal and you should not be thrown off your long term strategy by it.
- Financial advice is important if you’re objectives or strategy has changed
Before deciding to sell or switch to a more conservative investment option, such as cash, we strongly recommend you speak to your financial planner. It is important to ensure any switch is in line with your investment time frame and long term goals and objectives.
Past performance is not a reliable indicator of future performance.
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Q9. Should I switch to cash?
As covered in detail in Q8 above, in considering whether to sell or switch your investment there are a number of things to consider, including:
- Remember your investment timeframe
- Withdrawing after a negative return may cause you to realise a loss
- Consider the power of compounding
- “time in” the market not “timing” the market
- Market volatility is ‘normal’
- Financial advice is important if you’re objectives or strategy has changed
Note: There are tax advantages to hold your investments in the super and pension environment. If you are unsure of the tax implications of withdrawing funds, you should consult with a taxation adviser.
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Q10. I’m retired and I’m concerned I’m drawing down my capital
It’s natural to feel concerned when you see your account balance fall, especially if this is your main source of income in retirement. After all, you want your money to last for as long as possible.
Whilst you may be concerned, it’s also important to keep things in perspective and consider your investment time frame. Many retirees have an investment time frame of 10 years or more. The attached chart shows the minimum investment timeframe in relation to the investor (risk) type and also the typical investment mix for diversified investments.
| Where are you now in terms of the suggested minimum investment timeframe for your selected investment options? |
If you are still concerned, re-visit your strategy with your financial planner to see if it still meets your needs.
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Q11. Is now a good time to invest?
We are often asked when is the right time to invest. Whilst unit prices are lower now than they have been for several months, no one knows for certain if they will fall further, start to rise, or a combination of both. Only you can decide when is the best time to invest based on your own personal circumstances and goals.
Historically Australian shares have increased in value over time. To see the impact of various “crises” in perspective you can view theAustralian share market from 1900 to March 2008 and US share market from 1900 to March 2008.
Strategies such a dollar cost averaging can help you to ‘hedge your bets’ when investing. Investing a regular amount at regular intervals can help you to average out your purchase price over time. 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. Your financial planner should be able to advise you on how this strategy could work for you.
You should look at your investment strategy and speak to your financial planner if you are considering changing your strategy.
Past performance is not a reliable indicator of future performance.
This information has been prepared without taking account of your objectives, financial situation or needs. Because of that, before acting on the information, you should consider the appropriateness of it, having regard to your objectives, financial situation and needs. Before making an investment decision in relation to an AMP product you should read the current Product Disclosure Statement available from AMP or your financial planner.
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