Market volatility refers to extreme price movements over a given period. These may occur in a particular area, such as real estate or shares, and may be upward or downward.
Ever since COVID-19 started spreading across the world in late 2019, affecting every aspect of our lives, the term ‘market volatility’ has been hitting headlines.
But, what does market volatility mean? And what might it mean for your finances?
We explain, with the help of Timothy Vander Kraats, Director, A & T Financial Advisers.
Why is it important to take a long term view of market volatility?
Market volatility can feel like a one-off crisis. However, it’s important to remember that volatility is in the very nature of markets. Fluctuations are bound to occur and, sometimes, they’re rather extreme.
“In February and March this year, markets dropped 37%,” explains Timothy. “But, fast forward to the June quarter, and they picked up 16%. That’s quite a wild swing. Anyone who panicked and withdrew from the market at the end of March would have missed out on a lot of money.”
In the scheme of things, three months isn’t long at all. In the 141 years since the ASX was established, there have been 28 negative years, and the rest have been positive. In other words, each year, the average investor has a 1 in 5 chance of a setback, but a 1 in 4 chance of making gains.
Further, in the 20 years leading up to 2018, the ten best days in the market were responsible for 50% of returns.
“If you missed those ten days, then your overall return would have been cut in half,” says Timothy. “Instead of trying to predict the market, it’s better to focus on keeping your money in it for long enough that you receive long-term benefits. No one has a crystal ball.”
What can Australians do to protect themselves from market volatility?
During downturns, it’s easy to be swayed by the news. Headlines often focus on the negatives. When the COVID-19 pandemic began, the emotional impact of worrying financial news was intensified by the fact that the virus itself was new and unknown. Plus, so many people were unable to go to their workplaces, or catch up with friends and relatives.
“If you were reading the headlines and not speaking to anyone about them, you may have been susceptible to making big financial decisions based on your emotional reactions,” says Timothy. “That’s why it’s important to speak to someone, like a financial adviser, who will remind you of your long term plan—and that a downturn is just a short term blip, when you think of the next 20 years.”
How can income protection insurance and trauma insurance help during times of uncertainty?
When you’re going through an uncertain period, insurance can help by providing peace of mind. For example, if something happens, be it falling ill with a virus or having an accident, income protection can ensure that, if you need to go to hospital or take time off work, you can get along financially.
“You really can’t predict what will happen and, if you need to ensure financial security, that’s what insurance does,” says Timothy. “I can attest to that personally. My brother, who was perfectly healthy and was training for the iron man, had a stroke when he was in his thirties. There was no family history, no pre-existing condition, no link to anything that could have predicted it, and out of the two of us, he was definitely the healthiest. Five years later, he’s still recovering, but because he had income protection, he’s at least been able to meet his living expenses, and trauma payouts have covered the one-offs.”
Insurance can play an important role in ensuring that, whatever happens, you can maintain your financial status quo, whether that means paying off your mortgage or paying your kids’ school fees.
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