9 November 14

Beating the October blues

‘OCTOBER: This is one of the peculiarly dangerous months to speculate in stocks. The others are July, January, September, April, November, May, March, June, December, August, and February.’

So said Mark Twain, and he was as accurate as he was witty at capturing the headwinds that afflict all sharemarket investors -when is it a good time to invest and what is the risk of losing out?

Let us get some facts on the table. When you look at sharemarket return data both here and for the US there is no great difference in the distribution of returns among the 12 months of the year.

October is no better or no worse than the 11 other months.

That said October, certainly does seem to get a bad press. In part that may be because the 1987 sharemarket crash left an indelible mark on a generation of investors – yours truly included.

Certainly the volatility in the sharemarket market last month is not going to do anything to change that perception.

Newspaper headlines scream for your attention when markets take a sudden fall because it is dramatic, it is newsworthy.

However, is volatility really an investor’s enemy? Like many things with investing there are trade-offs and it depends on what type of investor you are.

For younger investors in the accumulation phase down periods for markets allows them to invest in assets at lower price levels.

We all like to shop when things are on sale or heavily discounted – buying bargains makes us feel good – yet to buy into sharemarkets when they are falling takes courage to overcome the fear factor.

But for people looking to build long-term wealth to fund their retirement lifestyle does it make more sense to buy when prices are high or low?

The answer may be obvious but the problem is that timing markets is virtually impossible.

The answer lies more in accepting the natural volatility within market cycles and having a long-term investment plan, the discipline to stick to it over the long run so that that periods of volatility can actually work for you.

For retirees the situation is different. A portfolio with minimum volatility will be much more appealing because the objective is more about wanting a reliable, steady income stream.

That comes back to recognising the level of market risk within a portfolio and why, for people nearing retirement age, adjusting the asset allocation and exposure to the more volatile investment markets is both sensible and helps them ignore the short-term market noise that comes when markets rediscover volatility.

 

Written by Robin Bowerman, Principal, Market Strategy and Communications at Vanguard Australia.

This material has been reprinted with the permission of Vanguard Investments Australia Ltd

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