The price of generating real above inflation returns by investing in the share market
is accepting the inherent volatility associated with equity investing.
Investors must remember that short-term price volatility is not the risk per se. The risk is
how you react to temporary short-term losses, which have always recovered given time.
The chart below illustrates the Intra-Year declines (drawdowns) versus the total return
achieved for the same calendar year. In other words, if you panicked and sold in March
2020 last year you crystalized a -40% paper loss, which had recovered to produce a positive
return of 16% by year-end.
The relative return between the investor who remained invested and the investor who
sold is a whopping 56%, which is a relative loss you will never recover from.
The two greatest risks facing retirees is longevity iro outliving their money and inflation and
the only way to protect against these risks is to have an appropriate investment allocation
to equities. This requires the investor to accept the short-term volatility, which is part and
parcel of investing in growth assets (shares).
Matching investment objectives to an appropriate investment horizon and understanding
your own personal tolerance for risk is the key to taking on a suitable level of risk to achieve
your long-term income and growth objectives.
Mcomm, CFP®, HdipTax
T. 021-205 1133