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Sharemarket corrections are a reminder to understand risk and why you are invested

 

What do recent sharemarket falls mean?

The sharemarket fell noticeably last week, and there’s a lot of talk about interest rate movements, wage pressure etc. etc. And, given the huge rises recently, corrections should be expected. Markets go down as well as up. But, over the long haul, they go up.

The fear and commentary that a market falling induces is called ‘loss aversion’. Put simply, people hate losing a dollar more than they love making one. That's why market commentary is more noisy and panicky on the downside than enthusiastic and vocal on the upside.

Corrections in the markets are great for long-term returns, because then can we buy high-quality investments at ‘sale’ prices. And to repeat a favourite quote of mine from Winston Churchill, ‘when the going gets tough, keep going’.

 Where will markets go from here? We have no idea. Nor does anyone else. Overall market movements are educated guesses at best. At times a commentator or economist gets market movements right, and they are the latest ‘hot’ guru, with books, media appearances and lectures following soon after. They make the clever move of saying plenty and being around long enough to be right sometimes. But they very, very rarely get it consistently right.

The most successful investor in modern times, Warren Buffet, recommends a very simple strategy for investing - have very diversified investments, focus on low fees, and profit from others fear by investing when markets are falling too. That's exactly what Simplicity is all about.

If you can’t stomach market downturns like we’ve just seen, then perhaps it’s best to go into a lower risk fund. You’ll have a smoother ride, but accept you will probably have less saved when you retire. There’s no right or wrong here, it’s a very personal decision.

Perhaps the only exception to this is those who need their money very soon, in which case a low-risk option might make sense.

In times like these, the best protection is diversity. It’s the only free lunch in investing. We love diversity, which is why all of our funds have over 3,000 investment in 23 countries. And when returns are lower, fees matter even more.

 

Cheers

Sam

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