Most people view share market downturn as unequivocally bad events. Suddenly, hard earned savings aren’t worth as much as they were yesterday. It seems as if our money is evaporating, and in the heat of the moment selling up can look like the best course of action which can sometimes lead to you losing your initial capital and crystalising the actual loss.

The alternative view

But on the opposite side of each share sale is a buyer who thinks that they are getting a bargain. Instead of getting 10 shares to the dollar yesterday, they might pick up 12 or 15 to the dollar today. When the market recovers, the bargain hunters can book a tidy profit through investment options that still have strong fundamentals.

So why do share markets experience downturns, and what are the upsides?

A range of natural and man made events can trigger market selloffs:

• Terrorist attacks.
• Infectious disease outbreaks such as SARS and COVID-19.
• Wars, the possibility of war, and geopolitical issues such as threats to oil supplies.
• Economic upheavals, the bursting of speculative investment bubbles, and market ‘corrections’.

In short, anything that is likely to reduce the ability of a broad range of companies to make money is likely to trigger a market sell off and everything goes down as a result, whether it is a great company or not..

The common thread that runs through the causes of downturns is uncertainty. In the immediate aftermath of the 9/11 attacks nobody knew what the size of the threat was and markets dropped. As the fear of further attacks receded, markets soon recovered and most recoveries have the best period of growth.

However, the initial drop in market value occurred quite rapidly. By the time many investors got out of the market the damage was already done. Paper losses were converted to real losses, and spooked investors were no longer in a position to benefit from the upswing. After the initial sell off it took the ASX200 Accumulation Index just 36 days to completely recover from 9/11 and if you sold your position and moved to cash, you would have missed this upswing in your investments.

Other downturns and recoveries take longer. The Global Financial Crisis began in October 2007, and it wasn’t until nearly six years later that the ASX200 Accumulation Index recovered its lost ground. This caused real pain to investors who bought into the market at its pre-crash peak, but for anyone with cash to invest after the fall, this prolonged recovery represented years of bargain hunting opportunities.

If? Or when?

Of course much hinges on whether or not markets recover. While history isn’t always a reliable guide to the future it does reveal that, given time, major share market indices in stable countries usually do recover. It’s also important to remember that shares generally produce both capital returns and dividend income. Reinvesting dividends back into a recovering market can be an effective way of boosting returns through the income generated from the portfolio.

Seek advice

Of course, it’s only natural for investors to be concerned about market downturns, but it’s crucial not to panic and sell at the worst possible time. The fact is that downturns are a regular feature of share markets. However, they are unpredictable, so it’s a good idea to keep some cash in reserve, to be able to make the most of the opportunities that arise whenever the share market does go on sale. You should also pick an investment strategy you are comfortable with eg. If you are a conservative investor and cannot deal with big market swings, you may want to stay clear of speculative shares or a high allocation to growth assets.

For advice on how to avoid the pitfalls and reap the benefits offered by market selloffs, give us a call at our Oran Park office on (02) 9188 1547 or email admin@rpwealthmanagement.com.au . We also have an office in Baulkham Hills and service Macarthur, Penrith, Parramatta, Campbelltown, Fairfield, Bankstown, Blue Mountains and the greater Sydney region.






The information in this website and the links has been prepared for general information purposes only and does not take into account your personal objectives, financial situation or needs. It is not intended to provide commercial, financial, investment, accounting, tax or legal advice. You should, before you make any decision regarding any information, strategies, or products mentioned on this website, consult a professional financial advisor or seek assistance to consider whether it is suitable and appropriate for you and your personal needs and circumstances.

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