How to protect your money in a volatile share market

Published in My Wealth Newsletter, Commonwealth Bank, November 2014 by Keely Double

Shareholders had a rocky month in October, as the ASX 200 fell dramatically and companies shed year-to-date share price gains. The market has now regained some lost ground, but many experts predict volatility will continue.

If you’re investing for the long-term, these kinds of falls can prompt you to question your strategy, potentially causing hasty decisions that take you off track from your original goals.

MyWealth looks at some simple suggestions to help you prepare your share portfolio for a volatile market.

Are you as long-term as you think?

If you own individual stocks outside the top 100 ASX companies or you’ve bought into companies whose share price has been particularly volatile, your portfolio may not really be geared towards a longer timeframe, says Janine Cox, investment analyst at Wealth Within.

“A lot of people might be thinking they’re long-term investors because they don’t want to do any work, but actually they have stocks that need to be managed,” she says.

Investors who aren’t interested in looking at share prices every day may be better off sticking to larger companies with long histories of steady price growth, Cox adds.

So what constitutes a long-term timeframe? 

Cox suggests a minimum of five years and preferably seven to ten to be able to withstand periods of market volatility and maximise returns from these types of investments.

Meanwhile, Amanda Skelly, head of SPDR ETFs at State Street Global Advisors, says they usually recommend at least three years, and five to seven if possible, for clients who are buying ETFs that track the performance of the Australian share market indices.

Act if you need to, but don’t react

Being clear on how long you want to invest for can also help you avoid reacting rashly to short-term price falls.

The market moves in cycles, Cox explains, and while it’s impossible to predict the future, it can help to know what’s happened in the past. 

Roughly every few years there could be a low and if you don’t have an understanding of how these cycles work, you may get stuck at a bad time, she says.

“Someone who wants to keep their long-term strategy simple, could look at the top 20 stocks [ASX 20] and say ‘I’m accepting a stock could fall anywhere between 7% and 20% [in the short-term] and that’s okay’,” she says.

“If your original strategy was ‘buy and hold’, why do you need to re-think it just ’cause there was some volatility on the market place?”

Of course, it’s important to remember ultimately you need to feel comfortable about the amount of money you have exposed to the market – and subsequently, to losses.

A clichéd, but still handy, guide in this situation is if you can’t sleep at night worrying about your shares, you’ve probably taken on too much risk for your appetite.

Selling off doesn’t have to mean selling out. 

 One option if you are feeling nervous about falling prices is to reduce down what you’ve got without totally selling out, Cox says.

She points out that, particularly if you still have another few years to reach your investing goals, you could potentially buy back into a stock down the track if prices stabilise.

Skelly suggests investors found opportunity in October’s falling market to diversify and reduce their dependency on individual stocks by adding a broader market ETF to their portfolio.

“Within our own offering, we’ve actually seen a pretty significant pick-up in our ASX 200 ETF,” she says.

“[But] rather than taking money out of the stocks that they’re owning, it’s the money that’s been sitting on the sidelines that [investors] are using to get back into the market.”

Skelly says ETFs often see a pick-up in demand in volatile environments, as investors become nervous about which companies to buy and favour options that enable them to enter the market without having to choose between them.

Balancing the risks

Returns from an S&P/ASX 200 ETF should mirror the performance of the ASX 200 share market index, meaning when the index is falling, so too is your ETF. 

When the index is rising, the value of your ETF should also be going up. On this basis, ETFs’ popularity in times of volatility can feel counterintuitive.

Wouldn’t it be better to try and pick shares whose prices are going to grow regardless of market conditions?

Skelly concurs that when there’s volatility, there’s an opportunity to pick stocks that can outperform the market. 

But there’s also a good chance you’ll pick stocks that don’t, she adds.

Even if you get a couple right, over a period of three or more years potential losses in the ones you get wrong could wipe out these gains, she explains. 

An ETF may help balance these risks.

As with any investment, however, it’s important to make sure you fully understand the benefits and risks involved before making any decisions. 

For example, returns from ETFs may not exactly replicate the indices they track, due to fees, taxes and other factors.

Setting up for the long-term

Some investors may be spreading themselves too thinly, Cox notes. 

For example, they may have bought small amounts of shares in lots of different companies over time, meaning certain stocks are no longer adding significant value to their overall portfolio.

“If they’ve got lots of shares and they’re worried about having to manage all different ones – you’ve got too many shares,” she says.

“So why structure yourself that way? Perhaps look for an ETF?”

A volatile market can be the perfect prompt for long-term investors who started without a clear strategy to really think about their goals. 

It could be time to clean out the closet, Cox continues.

Skelly says being too heavily exposed to any one asset class or sector is also a risk. 

With the Australian market so heavily weighted towards materials and financials, it can be hard to get this sector diversification just by investing locally, she clarifies.

“[For example], we don’t get exposure to a lot of technology here in Australia or a lot of pharmaceuticals,” she says.

One way for investors to diversify is through international and sector ETFs, which can give access to different return drivers in different markets, Skelly adds.

Keep in mind investing internationally can bring additional tax reporting responsibilities and your returns may be affected by foreign exchange rates, in addition to company and market performance.

Planning for ongoing volatility

“We’ve had a good run,” Skelly says, when asked whether Australian shareholders are likely to have to contend with ongoing volatility.

“Returns have been strong and volatility has been low … so it has been comforting for many investors.

“But I think the reality is … we’re experiencing a very uneven global recovery. 

There’s a lot of uncertainty out there and we think investors should prepare for more volatility over the medium term,” she says.

Why is the ASX 200 down on Eurozone concerns?

In a speech given at an investment conference on 14 October, Reserve Bank of Australia Assistant Governor for Financial Markets, Guy Debelle, agreed volatility had been “low for a prolonged period of time in the face of a number of events which would normally be associated with high volatility”.

“One thing which is certain is that the low volatility will not persist,” Debelle emphasised.

Meanwhile, commenting on the end of the United States’ quantitative easing program this week, Stephen Halmarick, head of economic and market research at Colonial First State Global Asset Management, said global financial volatility could be expected to rise until the US lifts its interest rates sometime next year.

To learn how you can gain the required knowledge and skill to ensure your success in the share market click here.

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