While periods of volatility in share markets can be distressing for SMSF investors, declines are a normal part of the way share markets operate and are invariably followed by a strong rebound, says AMP Capital.
AMP Capital chief economist Shane Oliver said uncertainties regarding emerging markets – and specifically, China and the US Federal Reserve’s first interest rate hike – have continued to result in volatile share markets in the past few weeks.
Mr Oliver said most share markets have not reached new lows for this downturn, however, and that periods of decline and volatility are a “necessary part of the way the share market works”.
He said it is important to note that of the 10 falls of 10 per cent or more experienced by the US market, only two of these falls – a 49 per cent fall between March 2000 and October 2002 and the 57 per cent fall between October 2007 and March 2009 – were bear markets.
“Unfortunately there is no agreed definition of a correction versus a bear market [but] my preferred approach is that a correction is limited to sharp falls, up to 20 per cent or so, across a few months after which a rising trend in share prices resumes, taking shares to new highs within say six months of the low,” he explained.
“By contrast, a bear market sees falls lasting many months or years and it takes shares more than a year to gain new highs.”
Based on this definition, only five of the 15 falls of 10 per cent of more in the Australian market since 1989, excluding this year, have been bear markets, said Mr Oliver.
Falls of 10 per cent or more are not unusual and most of these occur within a still rising trend which is re-established reasonably quickly, he said.
“Only a small proportion become bear markets. Australian shares had a decent correction (of 10 per cent-plus) in every year from 1996 to 2001 and yet made new highs within six months each time and each year saw shares deliver a positive return,” he said.
SMSF investors should also be aware that short-term corrections and bear markets do not equate to poor longer term returns from shares.
“Since December 1988, US shares have returned 10.3 per cent per annum and Australian shares 9.3 per cent per annum, despite numerous corrections and bear markets,” he said.
“So while shares are highly volatile over short-term periods, their returns are more consistent and solid over long-run periods.”
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