Navigating Market Volatility Series June 2024

After a strong period of performance for investment markets, it is easy to forget that periods of market volatility — such as share market pull-backs or corrections — are actually a very common and normal part of investing. What better time, then, to unpack some key concepts about navigating market volatility to better prepare you for what may lie ahead.  

Concept #2: Think like an investor, not a speculator

One of the benefits of taking a long-term approach to investing is that time is on an investor’s side. While speculators focus on short-term market sentiment and price movements, disciplined and patient investors focus on the long term — understanding investing is a marathon, not a sprint. Investors are able to ride out short-term market volatility and stick to their long-term strategy, knowing fundamentals will push the market higher over time. But why do share markets trend upwards?

At its core, investing in share markets is about investing in and becoming a part-owner of some of the world’s largest and best companies across a wide range of industries. These companies produce essential products and services that we use in our daily lives. Many are household names — companies like Apple, Microsoft, Amazon, Tesla, Samsung, BP, Nestle, Coca-Cola, Commonwealth Bank, BHP Group, Origin Energy, CSL and Telstra to name only a few.

Over time, economies tend to grow as populations increase and improvements are made in productivity through innovation. As economies expand, companies’ earnings also grow. Company earnings are then either reinvested back into the company to increase future earnings or paid out as dividends to investors who either reinvest the dividends or spend them on products or services other companies produce. Either way, company earnings growth is what ultimately drives share prices higher, increasing the value of those companies. Collectively, as companies become more valuable over time, so does the broader share market.

Although market sentiment can change daily due to the endless flow of positive and negative news and events and cause share prices to fluctuate higher or lower, little of this is relevant to the underlying companies. As long as the fundamentals of these high-quality companies remain intact and they continue to grow earnings, it is only a matter of time before sentiment turns in their favour. Thinking like an investor or a part-owner of some of the world’s best companies can be an effective way of ignoring the noise in the short term and instead focusing on the long term.