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We Never Know Why Company Share Prices Fluctuate, Only That They Will

17/2/2021

 
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​Everyone knows that company share prices go up and down – that’s a fact. What we don’t know is why they do – that is, what external events will affect the share market and when. Of course, there are people devoted to doing this for a living, and some people are more informed than others about trends in the market. What we are saying is that it’s not possible to predict exactly when a crash or a boom in the market will happen – the only thing we know for sure is that it will.
​No-one in January 2020 could have predicted the arrival of the COVID-19 pandemic, which impacted the market significantly during the year. It’s just not possible to pinpoint these events month to month or year to year. In fact, we think it’s a waste of energy even trying to forecast these trends. We don’t know what will make company prices go up or down – we just know that they will fluctuate.
 
We’ve heard experts in finance discussing such predictions. Quite recently, we heard an adviser claim ‘my market timing and predictions were correct, and my clients would be doing extremely well if it weren’t for the GFC.’ This was apparently somebody with over 40 years’ experience in financial advice. He advised his clients to move all their money into cash – but the problem was, company prices went back up fairly quickly, which meant those clients weren’t around long enough to see the benefits. They didn’t get back in the market fast enough and effectively lost that money. The problem with his statement of ‘they would have been okay if…’ is that these external forces are always going to be around. It doesn’t matter what causes a drop or a rise; we just know from experience that it is going to happen.
 
Let’s look at an example. Client A has an investment that’s a 50/50 combination of the largest 200 companies of Australia, and the largest 1500 companies of the world. If Client A fell asleep on January 1st 2020, and woke up again on December 31st 2020, they would have a 6% rate of return on those investments if they had done nothing in the meantime. At times during the year, the market was down by 37%. But if you didn’t look at that, and didn’t change your strategy, you would be up by 6%.
 
That’s important – because people usually invest over a 30 or 40-year period. And in the long run, you are always going to be making a return on that investment. As we like to say to our clients: volatility does no harm; but reacting to it does. 

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