[Editor’s note: Do further research of your own or talk to a licensed financial adviser before acting on ideas or themes in this article. This commentary provides general views on selling shares in a volatile market. Different investors could have different investment needs and priorities, as sharemarket conditions change.]
Investors have seen a sharp increase in sharemarket volatility over the last three years due to a myriad of factors. COVID-19 has triggered protracted global lockdowns since 2020 and caused global supply chain issues that persist today.
Consequently, the S&P/ASX 200 Index returned -11.1% in FY19/20, falling 36% from peak to trough in just in 32 days.
In February this year, Russia invaded Ukraine, inciting the first war between European countries since the Second World War and worsening the the global food and energy crisis. This drove inflation numbers to record highs, causing central banks to start hiking interest rates in an aggressive tightening cycle.
Historically, bull markets have much stronger returns and have lasted for much longer than bear markets, according to Ord Minnett analysis. Since 1980, the Australian All Ordinaries Index (Accumulation) has seen 33 years of positive returns vs nine years of negative returns, as the chart below shows.
Financial years have recorded a loss ~ 1 in 5 years
This is supportive of a long-term growth trend despite short-term market volatility, with Australian shares yielding an annualised financial-year return of 9% since 1993, Ord Minnett analysis shows.
Annualised returns since 1993
[Editor’s Note: There are potential benefits and risks from holding rather than selling shares during periods of high sharemarket volatility. Holding shares in a falling market could expose you to further short-term losses. Holding shares that are falling in value could potentially trigger a ‘margin call’ if you have borrowed to buy shares through margin lending or another geared facility. The key is understanding your risk tolerance for share-price losses, your ability to withstand short-term losses, and the potential implications of buying/holding/selling shares in the context of prevailing market conditions].
In Ord Minnett’s view, the key to achieving these long-term returns is to avoid selling during a downturn or a bear market.
It may be tempting to switch from shares to cash, to stop the value of investments from falling. However, this could potentially crystalise losses at the bottom of the market.
Also, investors could potentially miss out on receiving dividends. Or they might not be able to participate in capital raisings, takeovers and mergers, which could potentially offer attractive opportunities to invest in high-quality companies at lower prices.
Liquidating to cash can also present another critical problem: knowing when to reinvest. The sharemarket is forward-looking, while economic indicators are laggards. By the time an investor may feel comfortable enough to reinvest due to signs of an improving economy, they could potentially have missed out on those crucial gains at the start of the recovery cycle.
Markets will also attempt to price in future interest-rate movements and recessionary risks. So, if investors were to act only on news headlines, their actions could be belated and potentially not achieve the intended effect.
In Ord Minnett’s view, long-term investors should try to tune out market noise during periods of heightened volatility and stay invested in a well-diversified portfolio of asset classes that is appropriate to their risk profile.
Having access to an adviser can help investors navigate through this period of uncertainty by recognising any behavioural biases, avoiding rash or emotional investment decisions, rebalancing to reduce excessive risk and repositioning to better capture the evolving macroeconomic backdrop.
One of the greatest challenges for investors is knowing how to respond to a significant fall in share prices.
If the current sharemarket rally (to mid-August in FY23) continues, much of the commentary below may be redundant in the short term. However, there is no guarantee that this (or any) rally will not falter or peter out.
It pays, therefore, to have a plan should volatility return – which it ultimately will.
2. Decide how much you’re willing to lose
While buy-and-hold is a valid and appealing strategy for many, for others it involves too much risk. The market abounds with stocks for which long-term investors would have been wise to exit sooner rather than later. Although it is very difficult to time the peak or the bottom of a market, you can choose how much you’re willing to lose on a specific asset. Experienced investors may use stop losses to force themselves to sell when a stock falls 10% or 15%, for example. With a stop-loss strategy, you can choose a specific price target or percentage fall [at which to sell].
3. Reassess your portfolio
A market downturn is a good opportunity to reassess your holdings. Some sectors that performed strongly during a bull market may fare poorly during a weak period and require a reassessment. Are you holding long-term winners or were your stocks simply the flavour of the month? Tough markets force investors to weed out less-viable investments; don’t be left holding yesterday’s winners if the future looks tougher.
4. Don’t chase losers
The extraordinary recovery after the COVID-19 crash led some investors to believe that “buying the dip” was a faultless strategy. A dip, however, can turn into a protracted downturn, and not every sell-off is a great buying opportunity, in nabtrade’s view.
5. Don’t panic
Sharemarkets can turn very quickly. Selling into weakness can result in crystalising losses that would have been profits shortly after. You may also be unable to buy back into your favourite stocks without paying a much higher price. If you don’t need to sell, and still believe your investment thesis makes sense, it pays to hold, in nabtrade’s view.