Is it really armageddon?
One thing I notice about the media is a constant penchant for bad news. Bad news sells. Nowhere is this more evident than in the financial media and the language used to describe market events. Markets never rise or fall; they soar, swoop, crash, surge, swoon, collapse or capitulate. Notice that we have far more negative descriptors than positive.
To ordinary readers the headlines about crises in financial markets, driven by Brexit, trade tensions, and political unrest can be alarming. Market commentators are quick to call a bear market, which adds to investors' trepidation, and becomes a real problem for Australians worried about their superannuation.
But are markets really that bad?
First, a little perspective. According to Bloomberg the average daily movement of the S&P/ASX 300 Accumulation Index was 0.7%. The average daily movement for the Australian dollar was 0.6%. So movements of 1-2% in these markets are ordinary; they really don't warrant a headline.
That said, there is no denying that investment markets were rough in 2018, particularly in the final quarter. The Australian share market lost 8.4% over the quarter, while global share markets lost more than 10% in Australian dollar terms.
|Returns to 31/12/2018|
|Sector||Q4 2018||1 yr (% pa)||3 yr (% pa)||5 yr (% pa)||10 yr (% pa)|
|Emerging Market Shares||-5.0%||-5.3%||10.5%||6.6%||8.0%|
A bit of context helps. Losses were much less worrying over the full year, and longer-term returns have been excellent. It is the longer-term returns that will ultimately count when it comes to managing superannuation.
Every cloud has a silver lining. As market values fall, market valuations become more attractive. Lower valuations generally bode well for future returns. The charts below compare the current price of Australian and international share markets with average earnings forecasted by market analysts for 2019.
Valuations have been high in recent years, as prices have been bid up in anticipation of increased earnings. The recent downturn has caused valuations to dip to values not seen since 2013. They now sit below their long-term averages. While recent losses are not good news, lower pricing provides a buying opportunity.
My personal philosophy is to do the opposite to whatever the press suggests. The more negative press you hear from commentators, the better the opportunity. The more they cheer, the more nervous I become. As Warren Buffet once said, "be fearful when others are greedy and greedy when others are fearful".
Nobody knows whether the current market rout is over or not. But the chances are that it will not be relevant in ten years' time.
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Be fearful when others are greedy and greedy when others are fearfulWarren Buffet
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