One could be given for thinking that news editors are rubbing their hands in glee at the recent movements in global financial markets. I mean what better way to get people to tune in when headlines scream that the “Retirement Savings” of Australian’s are under threat or from the Herald Sun yesterday that we “lost $60 billion”.
On Tuesday night the ABC News dedicated about 10 minutes to showing a couple of people standing in the stock exchange looking at the numbers roll past.
Really? I can think of better ways to spend an afternoon.
So tomorrow will the Herald Sun print “Australian’s make $40 Billion”? Probably not, that’s not going to get anyone’s attention because when we feel nice and safe, we don’t pay that much attention to the news.
So what has happened? Why all the headlines?
Well for a start the share market has fallen around 13.4% from its most recent high in April. But this is not unusual, not by any stretch, it happens all the time in fact and will continue to do so. Probably what the headlines should actually say is “Australian Share Market Normal”. Because it is!
In the short term it matters not what the price of shares do, they go up, and they go down, however over time the collective value of all companies listed on the stock exchange go up in value.
We should never forget that the market is not some mystical being; it is in fact Ebay for the buying and selling of shares in businesses. It is easy to forget though that behind any share price is a real business, and those businesses are not affected by the price people choose to pay for their shares.
Take the Commonwealth Bank for example. Over the past 12 months people have paid anywhere between $74.14 (October 2014) and $96.32 (March 2015), but the bank is still doing what the bank does, running a very large financial services business. The fact that people paid different prices to own part of that business is irrelevant. Provided that over the years ahead the CBA can grow its profits (and pay some profits back to shareholders as a dividend), means that over time the price (and the dividends) will increase and the shareholder will benefit as a result.
And that is true for every company listed on the stock exchange.
Importantly however, we do not risk our money when we own shares, they are a necessary part of a diversified portfolio. It is diversification that is the key here; a little bit of this and a little bit of that, invested across the various asset classes according to our long-term needs, and our individual ability to cope with market fluctuations (called risk tolerance).
And to press the point home, consider this.
In the 33 years from 1979 to 2013, $100,000 invested in term deposits earned $259,880 in interest and the value of the term deposit was still $100,000 in 2013 (interest earned in 2013 was $4,150). Conversely the same $100,000 invested in industrial (non-mining) shares earned $1,294,622 in income (dividends paid in 2013 was $73,551) however the value of those shares had grown to $1,637,299. (source MLC)
They won’t tell you this on the news though.
So our advice to investors during this time, particularly if you have a diversified portfolio, is switch over to something better than the news, and maybe read a book rather than the finance section of the newspaper.