What causes share prices to fall?
In essence, a share market is just the collective listing of the individual share prices of many different companies. As investors buy and sell the share in those companies, their prices fluctuate, and so does the index that represents that share market as a whole (e.g. the All Ordinaries Index or the S&P 500). Share markets are highly sensitive to investor confidence. If many investors are selling their shares, the price of those shares will fall.
What's behind the recent share market turmoil?
There are two recent international events which have conspired to tip investor confidence and cause international share markets to fall.
- Government debt problems (sometimes called 'sovereign debt' problems) have been troubling several smaller European countries for months, but have recently spread to Italy- prompting a fresh wave of investor concern.
- Ratings agency Standard & Poor's has downgraded the United States Government's credit rating. This has never happened before- prompting sharp selling by investors in this market, driving share prices down.
Australia does not exist in a bubble. The global economic pessimism is bound to have some impact in Australia, resulting in a market downturn in our own share market. Secondly, depending which invest option(s) your super is invested in, it is likely that some of your money is invested, via various fund managers, in international shares. Movements in international share markets can therefore affect your super balance.
What's the state of Australia's Economy?
In Australia, people are saving more and spending less. Many of us are more concerned for our future financial security- particularly after seeing our own share market fall. And yet, the Australian economy remains relatively well placed compared to the likes of the United States and Europe and should continue to benefit from robust demand for our raw materials from China. Unemployment remains low and leading indicators suggest further, albeit slower, growth ahead.
How should you react to this market volatility?
This is a question that only you and your financial planner can answer. But in general terms, you might broadly consider the following:
If you're a long-term investor
The passage of time should eventually smooth out the current downturn in investment markets. Your super is with you all of your working life (and beyond), not just two or three months. It can be frustrating and worrying to lose money on investments. It is important to stick to a long-term plan, and not overreact to short-term distractions and media noise.
At times like these, you should speak to your financial adviser regularly, to make sure your plans remain on track through the inevitable ups and downs of investment markets.
If you're a short-term investor
The important thing is not to panic and rush into any decisions. However, you may naturally want to understand what impact the downturn is having on your savings and what, if anything, you should do. This is why it is very important to get professional financial advice before acting.
Should you change your investment strategy?
Again, only your financial planner can help answer this question for you. It may also depend on whether you're a long-term or short-term investor.
Surely, when things are looking uncertain, it can be tempting to switch your super into a less volatile and more secure investment option; but this strategy may have an adverse effect on your long-term savings, because:
- Conservative investments (like cash or term deposits) are only likely to produce modest growth over the long term. This might be good for certainty, but it may not be so good for your lifestyle in retirement.
- If you take your money out of investment markets during a downturn, you're effectively selling your assets for a lower price. It also means you're locking in any losses that would otherwise only exist on paper. You can't benefit from a market recovery if you're not invested.
For more information on how you can steer your super and investments in the right direction contact our office on 07 3397 7315.
Information contained in this blog is of general nature only. It does not constitute financial or taxation advice. The information does not take into account your objectives, needs and circumstances. We recommend that you always obtain professional insurance, investment and taxation advice specific to your objectives, needs and financial situation before making any investment decisions or acting on any information contained in this article or on this blog.
HKS Financial Planning as an Authorised Representative of Guardianfp Ltd trading as Guardian Financial Planning. ABN 40 003 677 334 AFSL 237641. Guardian Financial Planning is a part of the Suncorp Group.
