‘Lean on me, when you’re not strong’

When there are falls in the stock market, lean on your financial planner . . . and they will be your friend. Patrick Convey reports.

Investors who have experienced strong investment markets since the Credit Crisis over a decade ago may have forgotten, or never experienced, the pain – and even fear – that such downfalls can induce. 

When falls occur, how investors behave will have a great bearing on the longer-term outcomes they will experience. 

It is important to remember that equity market falls are an inevitable part of the process of building wealth through equity ownership. 

However, putting market falls in perspective and learning to survive them can be challenging. 

Sometimes it helps to remind ourselves why investors deserve positive returns from equities –ownership stakes in companies – and bonds – lending their money to governments and corporations. It is because the outcome that they will receive from their investments is uncertain. 

The future dividend stream from equities is, intuitively, far less certain than the contractual payment of coupons (interest) and return of principal at the maturity date of a bond. 

The greater the uncertainty of the outcome, the more an investor needs to be compensated with higher returns. 

Price volatility

The market’s view on the ability of a firm to deliver dividends can have a large impact on the price of a share, leading to share price volatility. The market’s view is influenced by multiple factors, such as management strength, strategy, competition and the state of the economy, plus its perception of risk.