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Sharemarket corrections are normal

13 June 2021

Mark Lister
A phone showing a volatile share price that corrects large increases and decreases.

So far, 2022 has been a very volatile year for investors.

Markets have been grappling with high inflation, and a growing realisation that interest rates will need to rise sharply in response.

The Russian invasion of Ukraine has added to this uncertainty, as well as putting additional pressure on supply chains and driving oil and commodity prices even higher.

If this bout of volatility has scared you, you should ask yourself whether you’re cut out for share investing, and if it’s time to quit while you’re ahead and head for safer pastures.

But before you do that, think carefully about what you’re trying to achieve, how you intend to get there, and make sure you also understand the risks of being too conservative.

US shares are still more than 30 per cent above pre-pandemic levels, but they’re down about ten per cent so far this year.

The NZX 50 has fared better, falling just 6.8 per cent in 2022.

However, (apart from March 2020) January was the worst month for the local market since February 2009, so we’ve had our share of weakness too.

It feels scary when markets move around like this, but for long-term investors times like these are par for the course.

Over the past 50 years or so, US and New Zealand shares have both returned about ten per cent per annum, respectively. That means you’re doubling your money, on average, every six or seven years.

It’s also comfortably above the annual inflation rate over that same period, which has been 4.0 per cent in the US and 5.7 per cent here.

At its core, that’s what investing is all about. We want to grow our wealth and protect our spending power from the ravages of inflation.

Shares, like businesses, real estate, farmland and other growth assets have historically been (and always will be) a great way of achieving that.

However, it’s certainly not a free lunch. You’re going to face some volatility along the way, and those ups and downs can come quite frequently.

Since 1960, US shares have experienced no less than 31 corrections (or falls of more than ten per cent).

Nine of those turned into full blown bear markets (declines of more than 20 per cent), mostly during recessions. The worst of these was from 2007 to 2009, when the S&P 500 tanked 57 per cent over 15 months.

Of the others, the average fall was 15.8 per cent and the average duration five months.

The crux of the matter is that sharemarket declines are normal. We’ve historically seen a correction about every two years, and a bear market about every seven or so.

If you’ve got the stomach to hold your nerve and stay the course through these periods (or even better, buy more while others are panicking) you’ll do fine as a long-term investor.

However, if this year has been your first taste of a rough patch and it’s caused sleepless nights, you’ve got some hard choices to make.

During the coming five years, you’ll likely experience a few more sell-offs like that, and one of them might even be a proper recession-induced bear market.

On the other hand, if you do choose to get out now, don’t be fooled. There’s a price for safety too, and it comes in the form of much lower returns.

Cash is a haven in the short-term, but it’s a terrible investment over any longer-term period, and it offers you little protection against inflation.

Bonds and fixed income should deliver higher levels of income, while providing a buffer during rough periods, but they won’t offer any growth either.

Risk, return, and potential volatility all go hand-in-hand, and these are arguably the most crucial concepts a new investor must understand and accept.

Sadly, you can’t have your cake and eat it too.

This article was also published in the New Zealand Herald under the title ‘Mark Lister: If January was scary, maybe shares aren’t for you’

Mark Lister

Mark Lister

Investment Director

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