01
May
2017

World Events and the Markets

The markets are difficult to pick

The financial markets are notoriously difficult to predict in the short term. One of the reasons for this is that they often react irrationally to world events sending the market shooting either up or down based almost purely on emotion.

Over the last 12 months we have had some huge world events, many of which were unexpected; President Trump, Brexit and the atrocities in Syria headline an interesting year.

Although 2016 was more eventful than most, history has shown that we can expect the unexpected, and there will, in most likelihood, be a number of significant events in 2017 as well.

With events such as these, we usually see the market move dramatically. Sometimes it crashes, other times it surges.  Either way, market volatility increases around these events.

If we take emotion out of the process, it is clear that the market has over-reacted in a lot of circumstances.

When Brexit occurred, initially we saw the Australian markets fall dramatically, about 3% from memory.  A week or so later the markets returned to roughly where they were prior to the referendum.

We should look at shares as what they are; an investment in the underlying company and assess the effect of the event on that company. For example, is the Commonwealth Bank immediately worth 3% less because of the Brexit vote? Probably not.

The fact that the markets returned to their previous position so quickly confirms that the initial sell off was an emotion based reaction.  This means that investors who sold their shares or managed funds (possibly by switching to a safer option) at that time have, in effect, sold for 3% less than they could have received a week either side of when they sold. If they buy back into the market once things have cooled down, they have turned what would have been a paper neutral position into a cash flow loss.

 

The key to successful investing in the share market is to buy a diversified portfolio of quality shares based on their long-term ability to turn a profit and ignore the peaks and troughs along the way.  It is essential to stick to your long-term strategy.  Focusing only on the troughs is likely to lead you to make a decision that is going to hurt your long-term performance.

Author; Alex McKenzie Categories: Future Financial Services Blog

About the Author

Alex McKenzie

Alex McKenzie

Owner at Future Financial Services

Past:

  • Paraplanner at Zammit Partners Investments
  • Unit Trust Administrator at Colonial First State

Education

  • University of Western Sydney
  • Penrith High

About

As a Financial Planner I help people to achieve what they would like in life. This involves helping you to identify the things in life they would like , developing plans to help achieve them and strategies to protect what you already have. We do this by providing Financial Advice to guide you through your life stages.

The financial planning process involves determining a clients current situation and financial objectives and tailoring strategies to assist in best achieving those objectives.

I am an expert in superannuation, investments and insurance, these are tools we use to help you achieve your goals.

I aim to use my knowledge of superannuation, taxation and Centrelink to efficiently use your assets and income to achieve your financial goals.

Retirement and pre-retirement planning, wealth creation, asset protection, insurance planning and estate planning are all areas of advice that I provide.

Leave a comment

You are commenting as guest.