Financial Markets

Why have the markets been so volatile?

Early in August, Standard and Poor’s (a well-known agency that analyses the state of the American economy among other things) downgraded the economy of the United States from AAA to AA+ rating. The rating changed the view of the US from a country that has a very strong debt repayment capacity to a country that has a slightly less strong capacity to meet its obligations.

This action made headlines around the world, and although economic commentators were surprised at the timing, they felt that the downgrade was very mild. They have been saying for some time now that the American economy is in trouble, as are a number of economies around the world, particularly in Europe.

Investor sentiment is one of the main drivers of the share market around the world. Investor confidence in the American market in particular has been fragile since the global financial crisis of 2009. When American investors respond to news, investors around the world seem to follow in the same way.

Even though the downgrade was mild and reflected what has been known for some time, investors panicked at the news. They dumped their shares and the US share market fell. However, as fast as investors sold, others bought, and over the next few days, the market went up again. Then more bad news was published and the market fell once more. Markets around the world followed suit.

This is called volatility – markets going up and down as a result of investor sentiment.

What does volatility mean for investors who already hold shares?

The important thing to remember in a time of volatility like this is that, although the value of your shares has gone down, you have only made a loss on paper. In the same way, if the value of your shares has gone up, you have not made a real profit – it is only on paper. If you are holding quality shares that are paying you good dividends, there is no point in trying to feel “safe” and selling your shares to invest in another area that will give you a lower return. That is converting a paper loss into a real one.

Speak to your Bongiorno adviser, remember why you have shares in your portfolio and continue to collect your tax-advantaged dividends. Eventually the market will settle down and there will be less volatility. Investors will become more confident and market prices will stabilise and start to go up again.

What does this mean for investors who want to buy shares?

In every market, there are buying opportunities and a volatile market is no different. The market may artificially depress the prices of quality shares and there will be good opportunities to enter the market at a lower price than you were anticipating.

This is a good time to speak to your Bongiorno adviser about the role of shares in your portfolio, the sort of shares that fit best with your investment goals, and the best way of buying shares.

You should also speak to your Bongiorno adviser about whether there is a role for international investments in your portfolio and what impact our strong dollar will have on such investments.

Please read our related article about Separately Managed Accounts in this newsletter.

As this general advice has been prepared without taking account of your objectives, financial situation or needs, you should consider the appropriateness of this advice before acting on it. If this general advice relates to acquiring a financial product, you should obtain a Product Disclosure Statement before deciding to acquire the product.