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This is an article which features in the recent issue of Advancement, an investor publication by Advance.
>> Advance investments |
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Amidst the understandable rising apprehension about market volatility, it’s prudent for investors to take a deep breath and reflect on what history tells us about market performance. This article offers some enlightenment on the Bull and Bear markets over the past few decades and Advance’s perspective on market volatility.
Bear
A ‘Bear’ market is when investment markets are dropping. An entry into a ‘bear market’ is defined by a downturn of 15-20% in more than one market.
Bull
A ‘Bull’ market is a long period in which investment markets rise faster than their historical average. Bull markets can happen as a result of an economic recovery, an economic boom, or positive investor sediment.
The use of ‘bull’ and ‘bear’ to describe markets comes from the way the animals attack their opponents. A bull thrusts its horns up into the air while a bear swipes its paws down. These actions are metaphors for the movement of a market. If the trend is up, it’s a bull market. If the trend is down, it’s a bear market.
Expect the unexpected
Most reports in the media seem to focus on the doom and gloom that surrounds our current investment market, and yes, we have had a rough ride recently. The quarter to March 2008 was the worst quarter for the Australian sharemarket since late 1987. The reason for this was twofold: firstly the sub-prime fallout in the US, which heightened fears that the US could go into recession, and then here in Australia we have been facing issues such as rising interest rates as part of the fight against inflation. However rough rides in investment markets are not unusual or unexpected. If you look at the chart on the following page – you will see the potential returns available from the various asset sectors.
Whilst Australian share investing has the potential for higher investment returns, you will notice that this road to fortune has experienced many more ups and downs than saving in a cash account.
Historical beats hysterical when it comes to investing
Investment markets are inherently volatile. But it is that volatility that also creates the potential for strong performance and opportunity. By taking a disciplined approach to how you invest, you can make volatility work for you, by staying invested in periods of poor performance to achieve smoother returns over the long run.
Historical data shows that the greater the time period invested, the lower the chance of losing money on market investments. Consider this: while 16.6% of Australian sharemarket investors lost money after a year, all were better off after five and ten year periods.†
CLICK ON IMAGE TO ENLARGE
Felix Stephen, our Senior Investment Strategist for Advance, has a positive outlook for the Australian sharemarket. “We believe that Australian shares are likely to perform well compared to other asset classes over the next few quarters because all the selling by nervous investors has made these shares relatively cheap.”
“Although we expect financial asset markets to continue to be volatile over the next few months, we believe Australian shares are generally a good buy because of the income they provide. And in the longer term we believe that the strong global interest in our resource market will underpin future growth. We expect that the next sustained sharemarket rise will most likely be led by financial shares, as these shares bore the brunt during the recent market turmoil” said Felix.
US to wash clean
One of main lessons investors have learned over the past few years is that investments are becoming increasingly global, and that the Australian market does not operate in isolation. So what is the outlook for the US? Felix believes that because of the Federal Reserve’s initiatives, such as lowering interest rates to ensure continuing liquidity in the economy, the US market will start to head upwards again towards the end of the year. These initiatives by the Fed gives us good reason to be optimistic and be confident that the current crisis is not likely to drag on.
The human effect
Felix says that human emotions are ultimately responsible for financial asset market prices, “That’s why we find that ‘investor risk appetite’ eventually determines the direction of a given asset class.”
“Investor risk appetite is strongly correlated to prices of risky asset classes such as shares. Given the current negative market mood, we suspect that we are likely to witness a very strong rise in share prices in the not-too-distant future because sharemarket trends reverse when investor risk appetite is either at a Euphoric-Peak, or Panic-Bottom,” explained Felix.
This article was written by Advance and contains only general information. To the extent that any information contained in this article is financial or investment advice, it is general advice and does not take into account the particular financial situation, objectives or needs of individual investors. Investors should consider whether the advice is appropriate in light of their particular financial circumstances before investing, and if necessary seek professional advice.
Source: Bloomberg, St.George Investment Solutions.
†Source: Advance Investment Solutions. Benchmark based on that annualised return of the S&P/ASX 200 Accumulation Index (the S&P/ASX 200 Accumulation Index was introduced in March 2000, prior to this the ASX All Ordinaries Accumulation Index was used) over 1, 5 and 10 years on all eligible time periods to 31 May 2008. |
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