Current market conditions are tough with investors feeling like a ship lost at sea.
Global stock markets are shaking and we are continuing to see the RBA push up interest rates with no signs of slowing down just yet.
A common feeling amongst investors might be to ‘do something’ essentially to stop the carnage.
Logging in and seeing the value of your investment plummet day-in-day-out may be starting the induce a sense of panic.
However, jumping ship in a time of turmoil is very often, the worst action you can take.
Let’s understand why.
Why you need to stay the course
The issue affecting markets and interest rates today is inflation.
Prior to the Russia-Ukraine war, labour and supply chain issues were already having an adverse effect on the rate of inflation.
Add on global disruptions and we find a perfect storm of chaos.
What can we expect with the rate of inflation?
We continue to see the Reserve Bank hike up interest rates every month in a bid to curb inflation.
Unfortunately, it hasn’t quite had the desired impact yet.
So we can expect to see the RBA continue to increase the cash rate in an attempt to lower the rate of inflation.
Experts predict an additional 2.5% rise by the end of 2022 with the anticipated peak of inflation at 7%.
The risk?
Australia may enter into a recession before the rate of inflation gets back to a normal level.
However, as a commodities exporter, we are at a lower risk of recession than other developed economies which will hopefully continue to buoy our economy until we come through the other side.
A silver lining for fixed income and equity markets?
As a consequence of falling markets and rising inflation, fixed-income and equity markets have copped a battering.
Yet, with lower equity market valuations at present, it is estimated that we will see greater long-term returns in comparison with an estimated increase of 1.5 percentage points when compared to 2021 10-year modelling.
Where to go next
When in doubt, always look back at history.
Market volatility is normal, and expected.
However, history tells us that following these inevitable troughs are higher than average peaks.
Use this time not to worry about the daily fluctuations, but to remind yourself of your long-term investment strategy.
- Why are you investing?
- What is your long-term goal?
- Are you following your intended strategy?
Answering these questions will help to calm your mind and stay on track with your investment strategy.
And until the tide turns, log out of your portfolio and ride out the storm.
If you’d like to take your investing one step further and would like to speak to one of our Financial Planners, book an appointment today.
