Market wrap: what to do if the ASX falls below 7000


This year has been a roller coaster for the Australian stock market given that it achieved a new all-time high before falling over 11% in January. February was a similar story, as the market rose strongly for two weeks before falling heavily over the next two weeks. This volatility together with the speculation around inflation, interest rates and now the Russian invasion of Ukraine has caused some investors to panic and exit the market, while others have chosen to remain in the market to ride out the swings. But is this wise?

I recently read an article from CNBC based on research from the Bank of America about the difficulties of timing the market, which showed the returns from each decade on the S&P 500 from 1930 to 2020. The research indicated that if you bought and held through that time your return would have been 17,715%. They also provided returns on portfolios that excluded the best and worst 10 days in each decade.

As justification for promoting a buy and hold strategy, investors are constantly told that if we miss the best 10 days when the market is rising our return will reduce substantially. However, since I launched my bestselling book "How to Beat the Managed Funds by 20%" over two decades ago, I have been educating investors that this assumption is incorrect and that the opposite is actually true because if you avoid the 10 worst days your returns would increase substantially. The research from the Bank of America now substantiates what I have been teaching our clients.

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While the buy and hold strategy achieved a return of 17,715%, if you avoided the 10 best days each decade the return was a measly 28%, which is why buy and hold is a marketable strategy in the financial services industry. But if you were out of the market on the 10 worst days, your return would have been a massive 3,793,787% or over 21,000% better than the buy and hold strategy.

While I don't advocate that investors panic and sell or react emotionally to news and speculation, it is obvious from the research that being a little more proactive with your investments by avoiding the large downturns in the stock market is a far better strategy for your portfolio in the long run.

What are the best and worst performing sectors this week?
The best performing sectors include Energy up over 10% followed by Materials up over 8%, while Information Technology is up over 4%. The worst performing sectors include Consumer Staples down over 2% followed by Healthcare and Financials, which are both just in the red.

The best performers in the S&P/ASX top 100 stocks include Lynas Rare Earths up more than 14% followed by IGO, Woodside Petroleum and BHP, as they are all up more than 12%. The worst-performing stocks include Magellan Financial Group down more than 10% followed by Insurance Australia Group and QBE Insurance, which are both down over 7%.

What's next for the Australian share market?
In contrast to last week, the All Ordinaries Index has performed well this week rising over 2% and erasing almost all of the fall from the prior week. However, before you get too excited thinking the down move is over, it is still too early to call an end to the current pullback, therefore, once again I would urge investors not to get caught up in the emotions of the market.

While it is possible that the market will continue to rise, there is also a possibility that the All Ordinaries Index could fall below 7,000 points before that occurs. To confirm the market is moving up, we need to see price rise above the recent high of 7,646 points. If the market falls next week then it is highly likely we will experience further falls with the market falling below 7000 points. As I have indicated previously, now is the time to be patient and to be looking for good stocks at better prices when the market does settle.

For now good luck and good trading.

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Dale Gillham is chief investment analyst at Wealth Within Limited (AFSL 226347). He also serves as the head trainer at the Wealth Within Institute (RTO 21917). He has more than three decades of experience in the investment industry, and is the author of How to Beat the Managed Funds by 20%, Dale's qualifications include an Advanced Diploma and a Diploma of Share Trading and Investment. He co-hosts the Talking Wealth Podcast, and his work has appeared in The Australian Financial Review, New York Business Journal, Wall Street Select and more.