Australia: Financial Markets and the S&P Downgrade
Investment Insights Alert

With recent reports on falling markets, it's not hard to imagine many people being concerned about their investments, particularly with the memory of 2008/09 still very fresh in our minds.

Globally, the appetite investors have for risk has significantly fallen since late April, which has seen global sharemarkets fall by around 18% (at 9th August am), although yesterday and today the Australian market has moved up again and overnight the U.S. market moved up sharply. For the most part, the falls have been a reaction to the building concern for the slow but sure spread of the European debt crisis and the recent US debt situation. In both cases, the delay in action by policy makers has taken its toll (most recently you will have seen the political football that saw President Obama's debt deal agreed on the last possible day). There is also concern around the weak economy in the U.S. and what the impact of budget cuts and potential tax increases may do to growth.

In times like these many people consider getting out of 'the market' and waiting for things to settle down, which makes perfect sense, but the problem is, you only know after the fact when things have calmed and in many circumstances you will miss the rebound that often follows. To provide some comfort, refer to the table below. Since World War 2 the S&P500 has fallen by at least 9.5% in a 10 day period only 4 times and on each of those occasions, 6 months later it was significantly higher every time.

Now we have a fifth instance where we have seen the S&P500 fall 16% in the 10 days ending 8th August and what comes next we don't know. We do know that 6 months is a short time frame for any investment so it's also worth noting what the impact of being out of the market, even for a day, can have on the long term return of an investment. The table below shows the annualised compound return of the ASX300 Accumulation Index from June 1992 through to December 2010 and what the return would have been had you missed some of the best days over that period.........the forgone long term return can be significant.

If you were out of the market for a month (25 days) your return drops to 4.7%, 60% lower than staying invested for the whole period.....

Finally, our Director of Wealth Management, Daniel Minihan, has posted an interesting piece on his blog looking specifically at the S&P downgrade and framing it in a different perspective, noting the paradox in both the downgrade itself and the investor behaviour that followed. To read his take follow the link below.

The Downgrade Paradox

We would also like to extend an invitation to all readers to contact one of our advisers if they would like to discuss any aspect of the current market volatility: Nareena Aracas 03 8635 1808, Tara Jones 03 8635 1917, Amy Horan 03 8635 1844, David Foord 03 8635 1985.

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