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Volatile markets and what to do about them

The European debt crisis, lower Chinese growth expectations and a drop in commodity prices have combined to drive a new wave of volatility on world financial markets. So what does it mean for your super and your investments? And how should you respond?

There’s no question that May has been a disappointing month for Australian investors. Just when financial markets seemed to be making some headway after the volatility of recent months, the European debt crisis has sparked a new round of market jitters.

And it isn’t just Europe that’s been making investors nervous. Moves by the Chinese government to reign in growth to more sustainable levels, while potentially positive in the long run, have nonetheless seen commodity prices fall. That’s impacted the share price performance of Australian miners, driving our market lower.

What does it mean for your investments?

At times like this, it’s only natural for investors to be concerned. But, while everyone wishes the market was performing more strongly, it’s also important to put these latest developments into perspective.

Although the Greek situation has shaken world markets, its direct impact on the Australian economy may be relatively small, although the financial impact will still be felt by Australian companies. Nevertheless, while commodity prices have declined in 2012, with the broad-based Thomson Reuters/Jefferies CRB Index losing 7.3% since the beginning of the year, it is still 45% above its lows in March 2009. So commodity prices remain strong.

Meanwhile, the federal government estimates that Australian mining and energy companies have a pipeline of $450 billion in investments. Which means that, even if our miners scale back or defer some projects, the mining boom is far from over.

How should you respond?

When markets disappoint, it’s important to step back and focus on the fundamentals of good investing. Here are some essential principles to keep in mind.

1. Stay diversified

Experience shows that diversification can be a good strategy for smoothing out investment returns and managing risk, while still achieving the returns you need to reach your investment goals. Depending on your risk profile, that means holding a portfolio spread across a variety of asset classes, including cash and fixed interest for stable returns, plus property and infrastructure, Australian shares and global shares for capital growth.

The chart below shows how these and other major asset classes performed during the year to 31 March 2012. It’s a useful reminder that one month’s underperformer can often be next month’s best performing asset class – which is why it’s important to diversify.

Asset class performance, March 2011-March 2012

Asset class performance, March 2011–March 2012

2. Take a long-term view

While market volatility can have a significant effect on your investments over the short term, its impact tends to be smoothed out over time. So if you’re investing for the long term, it makes sense to take a long-term view. That means staying invested and giving your portfolio time to recover.

After all, if you react to short-term market movements by exiting or switching your investments, you may risk turning your paper losses into real losses, while missing out on any recovery down the track.

3. Ensure your portfolio matches your risk profile

That isn’t to say you shouldn’t review your portfolio and your strategy to make sure they still fit your needs. In particular, it’s a good idea to check that your portfolio still matches your investment time-frame and risk profile, with the right mix of defensive and growth assets.

Remember, when markets are volatile, there are often good opportunities to buy assets at discounted prices. The aim is not to time the market, but to get the right balance between risk and reward, achieving the highest return compatible with your personal attitude to risk.

Talk to us

If you’re concerned about recent market moves and their impact on your investments, or you’re wondering whether it’s a good time to invest, contact your SWP adviser.


– Article sourced from Colonial First State, May 24 2012.

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