The Australian share market turned positive in the month of September, with the All Ordinaries index gaining by 1.5% to close the month at 6,800.6 points. The Australian Dollar was steady, with 1 Australian Dollar currently buying 67.50 US cents.
The Reserve Bank of Australia (RBA) board kept the official Cash Rate on hold at 1.00% per annum in September. However, the RBA board meets later today, with markets expecting a further 0.25% per annum rate cut to be announced.
Global share markets were all positive in September with the United States Dow Jones index gaining by 1.9%, the London FTSE gaining by 2.8%, the Japan Nikkei 225 gaining by 5.1% and the Hong Kong Hang Seng gaining by 1.4%.
The recent volatility in investment market returns serves as a good reminder of the benefit of investing through a full investment cycle.
The chart below shows the return of the Australian share market (including dividends) from June 2004 to June 2019 on the basis of investing through the full cycle, and then comparing with missing out on the top trading days.
As shown above, the total return in the Australian share market from June 2004 to June 2019 was a return of 8.86% per annum. However, if you were not invested on the 10 best days of share market return, your return over the same period reduces to 5.52% per annum. This is a 38% lower return, and you would have only missed out on the 10 best days of share market return over a 15-year period!
If you missed out on the best 20 days of share market return, then your total return is 67% lower than remaining invested. If you missed out on the best 50 days of share market return, then you would have experienced a loss.
Granted, if you were to miss the worst trading days then your return would look higher. However, it is human nature to want to withdraw an investment only after experiencing a decline in investment market values. Behavioural finance experts refer to this phenomenon as the “herding bias”.
The herding bias notes that humans tend to mimic actions of a larger group and follow the crowd. For example, if everyone is selling, you sell too and vice versa. Herding comes from our evolutionary need to fit in with the majority because exclusion from the pack can be dangerous as there would be less protection from predators.
It is important to remember that long-term investing should not be a binary decision between investing, or not investing. Diversification amongst asset classes has proven to be a good method of reducing risk and providing sound long-term returns.
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.