Provided by Mercer: 10/4/08
The new calendar year has brought with it volatility to sharemarkets worldwide, largely driven by the US sub-prime mortgage crisis and a weakened American economy.
Despite the current situation, it’s important to remember three key points:
1. Sharemarkets move in cycles – recoveries usually always follow declines
2. Investment performance is only one part of managing wealth – stick with your
existing, overall financial strategy
3. Don’t make any changes to your super without speaking with a licensed, or
appropriately authorised, financial adviser.
What is behind this market correction?
The correction is generally the result of sub-prime mortgage issues in the United States and a weakening US economy. There remains the possibility it may weaken further, partly as a result of the rising oil price.
Since 2007, many home owners (who are ineligible for a standard loan) began defaulting on their mortgage repayments. Increased mortgage foreclosures, combined with falling residential house prices due to oversupply, led to a correction in the US sharemarket.
As markets are highly integrated, this correction has occurred globally which has impacted Australia. This has broadly reduced the trading price of companies listed on our sharemarket, in turn reducing the value of investments.
It’s important to note that the Reserve Bank of Australia has forecast continued growth for the Australian economy in 2008, albeit at a slower rate and that our own sub-prime market is much smaller than the US.
When will the sharemarket recover?
It’s perfectly normal to see sharemarkets move up and down.
Economists have noted this pattern dates back several centuries. Since the 1960s, sharemarkets have on average recovered after a correction in less than five years.
While economists cannot predict exactly when the sharemarket will recover, the most important point is that historically, recoveries always follow a correction.
For most people, the long-term value of their super won’t be affected significantly. Remember, your super is a long-term vehicle. Based on investment returns of the past 30 years, short-term fluctuations have had little impact on long-term returns.
In other words, an occasional correction over several decades of investing should not significantly affect the long-term value of the retirement savings of an average investor.
What should you do?
Although it is always distressing to experience negative returns, you should avoid short-term decision making about your super. Some common responses to volatility include panic (‘maybe I should cut my losses and sell’), emphasis on hindsight (‘fund managers should have seen this coming’), group mentality (‘everyone’s switching to cash, maybe I should too’) and overconfidence (‘long-term strategies are for investors less experienced than me’).
How you respond should really depend on a range of personal financial factors and your super strategy. One possible response is to take no action at all.
Trying to time the rises and falls of the market is very difficult, even for investment professionals. If you try to ‘time the market’ you could end up worse off over the long term than if you stick with your chosen super strategy.
Remember; don’t make any changes to your super without first speaking with a licensed, or appropriately authorised financial adviser.
When it comes to super, a patient approach can bring rewards.
Seek advice
If you have any concerns or questions about your investment strategy and would like to speak with a Mercer financial adviser, please call us
on 1800 633 403.
This information has been prepared by Mercer (Australia) Pty Ltd ABN 32 005 315 917 for general information only. The information does not take into account your personal objectives, financial situation or needs. Therefore, you should not act on this information if you have not considered the appropriateness of this information to your personal objectives, financial situation and needs. You should consult a licensed or appropriately authorised financial adviser before making any investment decision.
