The Australian share market closed the month of May down 3.5%, with the All Ordinaries index closing the month at 7,455.2 points. The Australian Dollar gained marginally by 1.1% for the month, with 1 Australian Dollar currently buying 71.8 United States cents.
In interest rate news, the Reserve Bank of Australia (RBA) increased the official Cash Rate by 0.25% per annum in May. This was the first increase in the Cash Rate by the RBA since November 2010. While the Cash Rate now stands at 0.35% per annum, more rate hikes are expected throughout this year (as the RBA tries to combat inflation).
In political news, the Labor party was successful in forming what seems to be a majority government. Prime Minister Anthony Albanese was sworn in as the new Prime Minister late in the month. The change in Federal Government is not expected to impact markets in the short term, with the key focus for investment markets remaining inflation and how central banks move to combat this.
Global share market results for May were mildly positive, with the United States Dow Jones index flat, the London FTSE gaining by 0.8%, the Japan Nikkei 225 gaining by 1.6% and the Hong Kong Hang Seng Index gaining by 1.5% for the month.
Despite the mildly positive returns in the month, the financial press worked itself into a frenzy in early May as the United States share market index briefly reached a 20% fall from its high in January. When investors see large falls in their portfolio values, the emotions this can trigger often lead to poor decisions.
The chart below shows the cumulative return in the Australian share market since 2006 based on remaining invested at all times, and then “missing out” on the top 10 and top 20 trading days in the Australian share market.
Source: Lonsec
As can be seen from the above chart, if you “missed out” on just the best 10 trading days in the market since 2006, the value of Australian shares in your portfolio would be some 40% less than had you remained invested through the cycle (even less if you had rebalanced a diversified portfolio regularly).
While it can sometimes feel better to sell out of growth assets in periods of extreme volatility, picking the “bottom of the market” is near impossible to do on a consistent basis. It generally requires a completely different mindset to invest at the “bottom of the market” to that of an investor who wants to sell out when the volatility commences.
As highlighted in the above chart, you only need to miss out on the best 10 days over the past 15 years to have a seriously detrimental impact on your overall return. In this context, a good investment strategy should never be a “binary” choice between investing in growth assets or holding cash. A well-diversified portfolio has proven over time to be a sound method of delivering consistent long-term returns (while limiting some of the downside risk from share markets).
For more information, please contact Ryan Love on 1300 856 338.
This article is general information only and is not intended to be a recommendation. We strongly recommend you seek advice from your financial adviser as to whether this information is appropriate to your needs, financial situation and investment objectives.