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Market volatility series part 1: Why do markets move so much?

When global financial markets become volatile, it’s natural for investors to get anxious about the potential impact on their investments. But before you start selling up your shares, it’s important to understand what causes these market movements – and why they’re not always a reason to worry. Here are three things to keep in mind.

1. Volatility is a fact of life

Markets operate on a supply and demand model, so if there are more investors who want to sell shares than those who want to buy, it will drive down their value. Because this, demand moves in cycles, markets are constantly going up and down by varying degrees. In fact, this is one of the fundamental principles of investing, but it also makes the share market inherently unpredictable.

There are many factors that can influence market movements, from industrial and economic developments to wars, civil unrest and even weather. Key political events like the UK’s Brexit decision or Trump’s election win can also have far-reaching impacts.

Economic growth, for instance, is affected by global trade and production. Meanwhile, poor fiscal decisions in some countries can have a knock-on effect in other countries where they have debts. Political events may impact business and consumer confidence, which in turn can reduce spending and company profits. And then there are natural disasters, which can cause major damage to any economy at any time.

Since the global financial crisis, there have been a number of downturns in the share market, as well as in-between periods with strong returns. So keep in mind that even when the immediate outlook doesn’t look promising, it’s likely that the market will pick up again at some point in the future.

2. Shares are a long-term investment

Australia has a relatively open market and relies heavily on exports to countries like China and Japan. This means we’re also affected by movements in the global marketplace, even if there’s no direct impact to our economy. However, these impacts are usually short term.

History has shown that although share markets tend to fluctuate, the general trend is always upward. This is because shares are a high-growth asset class. So even though they’re more exposed to value fluctuations than defensive assets like bonds, they’re designed to provide higher returns over a period of five years or more.

When it comes to your investments, it’s important to think in years, not days – as short-term volatility won’t necessarily affect your portfolio’s potential in the long run. By taking a long-term view, you may have the confidence to ride out any short-term fluctuations in the market and make the most of growth opportunities as they arise.

So keep in mind that even when the immediate outlook doesn’t look promising, it’s likely that the market will pick up again at some point in the future.

3. Financial advice is key

When share markets fall in value, the impact on your investment strategy may depend on your stage of life, as well as your investment goals and timeframe. Each market movement is caused by a unique combination of factors, so there’s no simple solution for predicting what the next change will be.

While it can be tempting to sell up in the face of a market downturn, it’s a risky strategy that may impact long-term performance. This is because you may end up buying back the same shares at a higher price once the market picks up again. Instead, it might be a good opportunity to review your investment strategy and make sure it’s still appropriate for your personal circumstances.

That’s where your financial adviser can help. Your adviser has expertise in dealing with market volatility, so they’ll be able to calculate the potential risk to your investments and ensure you’re still on track towards reaching your long-term goals.

You can read more here about things to consider before changing your investment strategy.
 

Disclaimer

This document has been prepared by Colonial First State Investments Limited ABN 98 002 348 352, AFS Licence 232468 (Colonial First State). The information, opinions, and commentary contained in this document have been sourced from Global Markets Research, a division of Commonwealth Bank of Australia ABN 48 123 123 124 AFSL 234945. Global Markets Research has given Colonial First State Investments Limited ABN 98 002 348 352, AFS Licence 232468 (Colonial First State) its permission to reproduce its information, opinions, and commentary contained in this document and for Colonial First State to authorise third parties to reproduce this document. This document has been prepared for general information purposes only and is intended to provide a summary of the subject matter covered. It does not purport to be comprehensive or to give advice. The views expressed are the views of Colonial First State at the time of writing and may change over time. This document does not constitute an offer, invitation, investment recommendation or inducement to acquire, hold, vary, or dispose of any financial products. Colonial First State is a wholly owned subsidiary of the Commonwealth Bank of Australia ABN 48 123 123 124, AFS Licence 234945 (the Bank). Colonial First State is the issuer of super, pension and investment products. The Bank and its subsidiaries do not guarantee the performance of Colonial First State’s products or the repayment of capital for investments. This document may include general advice but does not take into account your individual objectives, financial situation or needs. You should read the relevant Product Disclosure Statement (PDS) and Financial Services Guide (FSG) carefully and assess whether the information is appropriate for you and consider talking to a financial adviser before making an investment decision. The PDS and FSG can be obtained from colonialfirststate.com.au or by calling us on 13 13 36. Past performance is no indication of future performance. Stocks mentioned are for illustrative purposes only and are not recommendations to you to buy sell or hold these stocks. This document cannot be used or copied in whole or part without Colonial First State’s express written consent. Copyright © Commonwealth Bank of Australia 2019
 

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