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Why it’s important to hold your nerve when the market drops

March 2020

While it can be hard to stay in the market when the share market plunges, now is not the time to panic

The COVID-19 (coronavirus) pandemic has triggered a share market crash, in Australia and internationally. Since 31 December 2019, when the first cases of the new virus were reported in China’s Hubei province, the disease has spread rapidly to Europe, UK, North America, Asia, the Middle East and Australia.

We’re now seeing extraordinary disruption to economies and societies, at home and abroad, and the effect on share markets has been substantial. They’ve suffered major falls across all regions, as supply chains are disrupted, and business activity is restricted. It’s possible they’ll remain low or fall further as the shutdown measures put the squeeze on companies’ turnover and profits and damage consumer confidence. The Australian dollar has also fallen significantly against the benchmark US dollar.

At times like these, it can be easy to make knee-jerk decisions, but rash short-term thinking can often be counterproductive.

Fear driven decision making

Seeing your investments go into the red is never a pleasant feeling. Given the fear and uncertainty COVID-19 has caused in the community, many investors may feel panicked about the state of their portfolio. Cutting your losses and moving your holdings into cash may seem a tempting option at this point. The emotion is understandable – no one likes to lose money – but allowing it to drive your decision making may not serve you well in the longer term.

Different assets classes produce different returns, at different times in the market cycle, and a diversified investment strategy is often the surest way to grow the value of your portfolio over the long-term.

You can also further diversify across fund managers and investment styles, so your portfolio is less vulnerable to a falling market - different investment styles usually perform differently throughout the market cycle.

Making a decision to move your money into cash may crystallise losses. While this is a way to defend against any possible further losses, it will also mean that you miss out on gains when the market starts to recover again.

Timing the markets is almost impossible. Legendary investor Warren Buffett is well known for his investment philosophy and strategy of holding the course when markets fall – and he’s one of the world’s most successful investors. One of his famous quotes is “our favourite holding period is forever”.

Dramatically changing course

While the COVID-19 pandemic represents new territory for investors and businesses, chances are the market will stabilise in the medium to long term. History has shown time and again that share markets have the ability to recover from significant market events and be a source of returns in the long-term.

Reminding yourself of your long-term goals can be a good way to counter the sense of panic the COVID-19 pandemic may have generated around your personal finances and investments.


Going it alone

Now isn’t the time to go it alone. Your financial adviser can help you to identify your financial goals, your appetite for risk and your cash flow requirements. They’re also well placed to talk through any concerns you may have, as you navigate the continuing uncertainty the next few months have in store for all of us, financially and personally.

Financial advice is critical in uncertain economic times.

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Taxation law is complex, and this information has been prepared as a guide only and does not represent taxation advice. Please see your tax adviser for independent taxation advice.

Before re-directing your super or moving your money into your product, you will need to consider whether there are any adverse consequences for you, including loss of benefits (e.g. insurance cover), investment options and performance, functionality, increase in investment risks and where your future employer contributions will be paid. Any investment is subject to investment risk, including possible repayment delays and loss of income and principal invested. Returns can go up and down. Past performance is not indicative of future performance.

The information provided is of a general nature and does not take into account your personal needs, financial circumstances or objectives. Before acting on this information, you should consider the appropriateness of the information, having regard to your needs, financial circumstances or objectives. Opinions expressed in this document are those of the authors only.