Market Volatility - a Friend to the Long-term investor?
Volatility has returned, but Markets are up for the Right Reasons
We mentioned a couple of updates ago that more ‘normal’ volatility has returned to markets so far in 2018. This can be unsettling to investors as they can start to worry about the value of their portfolios. However, volatility actually provides very valuable opportunities to the long-term investor. History tells us that markets always go up over the long-term, so when they have small dips, this is a bit like the market having a sale! Warren Buffett, one of the world’s most successful investors, once said “whether we’re talking about socks or stocks, I like buying quality merchandise when it is marked down”. One way of systematically taking advantage of these market ‘sale’ opportunities is through something called “dollar cost averaging”.
Let’s take a look at a quick example to illustrate this. The chart above shows a company’s share price over time. As you can see it fluctuates between years, but over the six years the price goes from $5 to $10. Each of the boxes shows the number of shares you can buy if you invest $1,000 each year. As you can see, in year 3 when the price is at its lowest, you can purchase the largest number of shares. At the end of the year 6 you finish with a value of $10,090 (1,009 shares @$10 per share). If you compare this to a scenario of no volatility, where the share price moves in a straight line from $5 in year 1 to $10 in year 6 and you invested the same $1,000 each year, the value you finish with is only $8,460 (846 shares @$10 per share). That’s 16% less than if there are dips in the share price along the way. Moral of the story – having a structured approach and regular contributions can help turn short term volatility to your long term advantage!
Booster Market & portfolio update – May
Global share markets added another 1% in May, amidst a background of solid economic growth spiced up with news of political instability in Italy. While change of governments can create volatility, ultimately markets are driven by economic growth and growth in companies’ earnings.
The change in Italian Government is the latest round of political uncertainty, and adds to a long line of changes following Britain’s vote to leave Europe almost two years ago. However, these have all turned out to be just bumps in the road - the Global Economy has grown by around US$10 trillion over the past two years!
We have continued to add diversity to Booster portfolios through additional investments in Booster’s Tahi Fund, which focuses on investments in New Zealand businesses outside the local share market. During May, Tahi bought a stake in a sizeable 100-hectare avocado orchard located on Motiti Island, off the coast of Mt Maunganui. Being located on an island and surrounded by warm sea temperatures means Motiti has its own microclimate and is able to bear fruit earlier in the season – adding to returns by capturing most of the New Zealand avocado market during this time.