With the Covid-19 situation in Sydney continuing, there are concerns not only in regards to the impact on all our daily activities, but also the flow on effects to the economy and the Australian share market (and our portfolios).
As the situation evolves, it is a reasonable expectation that we may see higher levels of volatility in the share market in the coming weeks and months. You know from your experience, especially over the past 18 months, that short term wobbles are part and parcel of investing for the long term. But I wanted to get in touch now, in case this volatility eventuates.
Hopefully any volatility we see won’t be as significant as we experienced last year, however it’s important to keep in mind that since the lows of March last year, we’ve seen the market not only recover but to increase beyond its previous highs – the best returns I have seen in a long time. It is important to remember to avoid selling assets as a response to short term market falls, as this strategy only crystallises losses and doesn’t allow you to benefit from any market rebound. It’s also times like this that shows the importance of holding a diversified portfolio that includes a portion of defensive assets.
I have summarized a few points below from an update I received yesterday afternoon from the Chief Investment Officer at Lonsec Investment Solutions, Lukasz de Pourbaix. It highlights the importance of a diversified portfolio, now more than ever. If you’d like to read the article in full, please click here.
“The recent increased number of Covid-19 cases in Australia and in some parts of the globe highlights how quickly things can change and why it is critical that your portfolios are diversified and have some protection”.
“Policy setting also remains conducive to equity markets, with interest rates remaining low as inflation subsides. In addition to supportive monetary policy, fiscal support also remains a continuing theme. Economic indicators such as employment figures, PMIs (Purchasing Managers Index) and consumer confidence all suggest that the economic recovery is well on track, with some indicators exceeding pre Covid levels.”
“Despite these positives, risks remain – one of the biggest being complacency. While we believe that risk assets continue to offer a suitable return relative to bonds and cash, the increasing divergence in asset and security returns suggests not all boats will float equally. Some of our indicators suggest that the threat of a ‘tail risk’ event is on the rise. Policy error, geopolitical tensions or the path of the pandemic taking an unexpected turn are all plausible. Therefore, ensuring portfolios are diversified remains important.”