There’s no denying that we’re living in interesting times. Unemployment is at historic lows in Australia and, off the back of a pandemic, consumers spent freely throughout 2022¹.

Nonetheless, some economists have warned that high interest rates, combined with the falling real wages caused by high inflation, could cool the economy to the point of a recession in the second half of 2023². On top of all that, there’s the potential for the Ukraine-Russia or China-Taiwan conflicts to escalate in the coming months.

While economists have their predictions for 2023 and beyond, nobody can know for certain what interest rates, investment returns or inflation we’ll see over the coming months. This uncertainty can feel uncomfortable at best, but there are things you can do to help stay resilient until the dust settles.

Focus on time in the market, not timing the market

A turbulent market can play havoc with our emotions, but being able to tolerate a certain degree of volatility can be part and parcel of being an investor. And, while markets go up and down in the short term, it’s important to remember that over the long term, the Australian share market has seen a general upward trend and healthy returns. And, investors who patiently play the long game, usually manage to come out on top.

A look back at share market history can often be reassuring. Between 1900-2021, the Australian share market has returned an average of 13.2% per annum³. Australian residential property markets haven’t performed quite as well. Nonetheless, depending on where it’s located, your home would have increased in value by an average of 3.9%-5.9% every year for the last three decades⁴.

Of course, if you’re close to retirement, time may not be on your side. In which case, there are a few strategies that can help with minimising the impact of market volatility on your retirement plans.

Resist the urge to make hasty decisions

While we can take great comfort in what history tells us, it’s only human to want to maximise your gains when markets are performing, and minimise your losses when an economic downturn appears to be looming. However, acting impulsively and following the herd can be a risky investment strategy.

After the pandemic arrived, many Australians changed how their super money was invested. For example, they switched from a high growth investment option to a conservative one. In a study to analyse switch decisions between 1 January 2020 and 31 March 2021, Griffith University found that Australians made a lot of ‘bad switches’. The study found that half of super fund members who switched during the crisis period would have been better off doing nothing⁵.

Vanguard recently conducted similar research into investors who alter their investment strategy in response to changing economic conditions⁶. Their study found it to be extremely hard to consistently identify the best times to buy into and sell out of markets. Even if an investor somehow manages to do this, generally the gains are marginal when compared with someone who simply buys assets and patiently holds on to them.

Go back and review your asset allocation and strategy

For some, it can be easy to take a dispassionate view of market movements. Whereas, for others, it can be challenging to remain coolly rational when the value of your assets is declining or threatening to decline. One way to reduce anxiety during turbulent times can be to go back and remind yourself of why (and how) you chose to invest in the first place.

A good starting point can be to remind yourself of your medium and long-term goals. What is it that you want to achieve in the next 2, 5, 10 or 20 years? With those goals in mind, look at your current asset allocation and investment strategy to see if it still makes sense for you, your risk profile and your goals for the future.

Doing this exercise can help you feel reassured to stay the course with your existing strategy, or more equipped to rationally and calmly make some adjustments, if that’s what’s needed.

Stay vigilant about cash flow

Of course, coping with market volatility is just one part of staying financially resilient. While inflation and interest rates feel out of control at the moment, there are other things you can do to help with improving your financial resilience closer to home, such as staying vigilant about your cash flow – now and in the next couple of years.

For example, building up a decent emergency buffer. Having a sizable amount of money set aside for unplanned expenses or a safety net if your finances come under pressure can go a long way to helping you stay cool and confident about your position. You may even decide to postpone big, non-urgent expenses and instead channel this money into your emergency fund, if that will provide you with more security and peace of mind.

It’s also a good idea to really understand what you can live on, if you need to. While your household finances may be OK for now, knowing what outgoings you can quickly trim back on, can go a long way to helping you feel more confident that your budget has some room to breathe. One way to do this, can be to ‘bucket’ your spending into ‘essentials’ and ‘non-essential’ buckets. Doing this will quickly help you identify what income you truly need to live on.

The coming months are likely to test many investors and households, financially and otherwise. As we move through this period of uncertainty, keeping on top of your short term finances and having a sensible investment strategy to help build your wealth over the long term can help you with staying sane, and on track with your goals.

Sources:

1 https://insideretail.com.au/business/australians-set-records-for-pre-and-post-christmas-retail-spending-202212
2 https://www.abc.net.au/news/2023-02-21/australia-to-flirt-with-recession-this-year-warns-nab/102002938
3 https://files.marketindex.com.au/files/statistics/historical-returns-infographic-2022.pdf
4 https://www.corelogic.com.au/news-research/news/2022/the-long-game-30-years-of-housing-values
5 https://research-repository.griffith.edu.au/bitstream/handle/10072/410969/MacDonald526355-Published.pdf?sequence=3&isAllowed=y
6 https://www.vanguard.co.uk/professional/insights-education/insights/strategic-asset-allocation-a-timeless-solution