Why the latest market volatility is a lesson in being patient

High levels of volatility have returned to share markets this year in response to negative sentiment around the likely impact of US President Donald Trump's tariff policies on both the US and the global economies, with many market observers now predicting recession.

While the short-term impact of Trump's economic policies is unquestionably negative, so too is reacting to market movements, and selling shares or changing portfolio strategy.  The events of the last few months have, if anything, strengthened this conviction.

It is essential that investors stick to their plan because if they sell shares now and reconfigure their superannuation asset allocation, they could be locking in losses.

The Australian share market has dropped around 8.6% from mid-February.

In the US, equity markets are down, led by technology shares, with the Nasdaq Composite Index dropping 18.7% to date since February 19 and the S&P 500 is down 16% over the same period.

It has been a sharp turnaround from 2024 - when Trump was elected in November, the widespread belief was that his business-friendly policies would be good for corporate America and the share market.

Prices rose strongly after Trump's election but that positivity has rapidly turned to fear as markets have begun to contemplate the real risk that the tariffs and large layoffs of public sector staff may lead to a US and global recession.

Now, many investors are selling shares and moving to cash or buying up gold, the price of which has shot higher in 2025 to several record highs around US$3500/ounce.

Investors have also been selling US assets once considered safe, including US Treasuries and even the US dollar, as well as shares.

In such wild times, it is important for investors to stay the course.

If you have a portfolio mix for your retirement nest egg that you agreed to with your financial adviser when you were in a calm and rational state, then now is unlikely to be a good time to change that mix.

In these days, don't read too much news, because it is all bad, with headlines screaming market devastation and historical drops.

The important point we make to our clients is to stick to their plan.

A buy-and-hold strategy of investing in the S&P/ASX 200 will inevitably provide superior returns than staying in cash over the long term.

Indeed, by staying invested in the share market, investors can capture all of the top trading days which often come after the worst days.

Share market investing success is achieved through time in the market, not timing the market to make share purchases or sales.

There has been a lot of research which shows that timing the market is almost impossible to achieve, given that good and bad trading days fall so closely together.

For example, a recent study by JP Morgan reported that over the past two decades, six of the seven best share market days in the US (using the S&P 500 index) happened immediately after the worst day.

Investors would have been wiser to stick with their strategy of making investment decisions based on long-term return expectations rather than reacting to short-term market movements.

For our own clients, we have positioned portfolios to be well underweight to the US equity market, and in particular large cap US shares, having held the view for some time now that the US share market was overvalued.

It is also very important to invest according to your tolerance of financial risk so you can sleep well at night, irrespective of what Trump is saying or doing.  Generally most investors are seeking a rate of return that will cover their financial needs.

For retirees this may be 7% a year to cover their 5% pension withdrawal and 2% for the long term impact of inflation.

It is clear that a portfolio aiming to achieve this level of return. is going to need a mix of both shares and fixed interest.

The important part is to ensure there is sufficient cash and fixed interest investments that allow you to continue to withdraw your pension requirements without having to sell shares at depressed prices.

Another way to insure against uncertainty or market shocks is to try and save a bigger nest egg, or to plan on working part-time after you retire, so you can keep on earning income.

If we go through another financial crisis that lasts three years or even longer, and investment returns are limited for a long time, you would still be earning an income.

This can deliver additional certainty that you can achieve the lifestyle that you want in retirement, even when markets aren't rising.

Similarly, building a bigger capital base can be a very effective form of insurance against the significant economic uncertainty we are seeing.

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