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Like any kind of risk associated with money, thinking about volatility can be daunting. But what we always say is that you can never entirely get rid of any risk; you can only shift it.
If you try to avoid market risk, and therefore don’t invest in shares, then your money is probably going to be sitting in term deposits in a bank. By doing this, you’re actually taking away a lot of your future purchasing power. As inflation occurs, you are a lot less likely to generate enough of an income from those term deposits to live off during retirement. So while you would be eliminating the risk of volatility, you are increasing the risk of not saving enough for your retirement.
Although volatility is just one of many risks, people tend to focus on it because it is the most visible. You can easily see the balance of your superannuation dropping and rising on a daily basis. And when there’s a downturn in the market, seeing this drop can be really unsettling.
Now compare this to property. Owning property carries risk, too – it’s just less apparent. Whether you live in your property or rent it out, you generally cannot see its value on a daily basis. But, similar to shares, it is also a long-term investment, one in which you don’t expect a return in the near future. So the daily value is actually irrelevant. Investing in shares should be treated with the same mindset – that the balance doesn’t need to be utilised for an extended period of time.
Towards the beginning of the Covid-19 pandemic, the share market dropped by around 37%. A superannuation balance of $400,000 would have dropped to around $250,000. But not long after the drop, buyers started coming in and purchasing companies, and slowly prices started to recover. But seeing such a drop in your balance can seem like a pretty significant loss. The thing to remember, though, is that these companies won’t drop to zero – they are worth something, and someone will always buy them. Unfortunately what we see instead is that people panic and sell everything before this correction in the market occurs. And when they try to re-enter the market, they’re buying shares at a much higher rate than they sold for.
For more information, check out the following podcasts:
104: Retirement Risk: Purchasing Power Risk
115: Why Elections Don’t Affect Companies’ Value
As always, we are here for comments and enquiries. You can email us at podcast@mo50.com.au, or call us to make an appointment on 07 4772 0938
Published by Dallas Davison, Michael Hogue and Ali Hogue. January 6, 2021