June already and we’ve seen significant change in the 1st half of 2022 including a new Prime Minister, Ukraine war, supply shortages of almost everything, spiralling cost increases causing the highest inflation in decades, markets pricing a sharp jump in interest rates (from near zero) all combining to spark fears of a recession and causing market volatility. This isn’t all bad news as higher interest rates are long welcomed by investors with cash who can now obtain a 1-year term deposit of 3% (up from 0.9% only a few months earlier).
This jump in interest rates and inflation has sparked a heavy sell off in growth-based investments including health care, technology, and some small companies after a phenomenal period of asset growth since the Covid outbreak in early 2020. Given we haven’t seen market volatility for a few years we thought the following perspective might be helpful:
- The ASX 300 (top 300 Aust listed business) has generated positive returns in 17 of the past 21 (or 81%) calendar years.
- An intra-year decline of >10% has occurred in 14 of the past 21 years (or 67%).
- Of the 14 down years, 10 years (or 71%) finished with a positive return. The most recent was 2020 (Covid) with an intra-year reduction of -36% to finish the year +2%.
Chart: Dimensional Funds Australia
Despite the up and downs, an investor in the ASX300 from 1st January 2000 to 30th April 2022 (including recent volatility) captured a return of 8.36% per annum (vs. cash 3.87% pa & inflation 2.59% pa over the same period).
The result is similar for the US (S&P 500) with positive returns in 16 of the past 21 years (76%).
Volatility is a natural part of the investing life cycle. When markets move up or down emotions become more animated and it’s important to recognise when it happens to ensure a balanced decision-making approach is maintained to achieve long term success. History indicates markets routinely reward investors who avoid the temptation to predict the future despite what “might” happen and instead focus on the certainty which comes from holding a well-diversified portfolio that contains personalised safety buffers and risk controls unique to each individual and their goals.