The Australian share market lost around $70 billion over the last week as the coronavirus outbreak spooked investors and caused a global stocks sell-off, and if you’re a first-time investor, those losses can be extremely concerning.
Then on Tuesday, Aussie stocks posted gains of 1.4 per cent, leaving young investors confused - with a slight whiplash.
So, if you’re a young investor who is worried about a share market crash, here’s what you need to know during periods of stock market volatility.
Also read: Here’s how to make money during a pandemic
1. The share market is a long game
Shares are a long game, which means if you’re going to pull out of the market any time stocks go south, you’re not going to win.
“Shares are a growth asset class and need to be viewed as a long term investment. Typically that means seven years plus,” Stuart Fechner, director of research relationships at Bennelong Funds Management told Yahoo Finance.
“If millennials or any other investors think they can go it alone and make all the right decisions at the right time, unfortunately it doesn’t usually end up working out that way – especially at times of market stress or worry.”
But if your goal is short-term, like saving a house deposit, perhaps the share market isn’t for you at all.
“Millennials (or any other generation) should never change their investment strategy based on market volatility,” Jonathon Philpot, HLB Mann Judd said.
“If their personal strategy is saving for a significant purchase in the next two-to-three years, such as a car or deposit for a home, they should leave their money in the bank, even though interest rates are terrible. It is simply too short a period to risk investing in the share market.”
2. Share market drops are nothing new
The share market has dropped before, and it will drop again, AMP chief economist, Shane Oliver said.
“History tells us that shares are volatile,” Oliver said.
“Whether it’s the recent coronavirus crisis or the Eurozone debt crisis or the trade war - the triggers are somewhat different, but the end result is the same.
“The point is, the share market usually follows a similar pattern. It comes down to what people get nervous about.”
Large market crashes could feel the end of the world right now, but the experts can assure you they’re not.
“Large market crashes are a great learning curve for younger investors,” Philpot said.
“At the time, a 10 per cent fall in your wealth feels like the end of the world is coming. A few months later you may still be down on your investment but you realise...things get back to normal, and usually after a year you are back ahead on your investment and you forget about the whole situation, until it happens again.”
3. You’ll still get more returns from shares than a bank
Oliver said you should expect to return around 11 per cent annually from the share market - a big number compared to current bank interest rates.
The Reserve Bank of Australia has dropped rates to a record low 0.75 per cent, which means savers are losing out.
“With a [savings] rate of 2.80 per cent per annum, if you deposited $1,000 a month for five years, you’d earn $1,353.92 less in interest, versus a rate of 1.95 per cent per annum,” Finder’s money expert Bessie Hassan told Yahoo Finance.
And if you were to deposit more than $1,000 per month, the difference in interest earned would be even greater.
4. Keep some cash
If you’re a little more risk-averse, and you’re going to lie awake at night terrified about your share portfolio, you can always just keep some of your cash in cash.
“Cash tends to be the safest asset class and also the most liquid one,” Fechner said.
“Cash is not necessarily an asset class that should be invested into for the level of return it offers, but most notably because it is low risk.
“In fact having a portion of your overall investments in cash can be sensible. Shares are a long-term investment but in the short term, as we’ve seen, they can be quite volatile and provide negative returns.”
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