CEO MESSAGE MARCH 2023 | SEQUENCING RISK

In this month’s newsletter, we discuss why it is not always ideal to sell investments in share markets, particularly when there is a downturn.

Now I am sure that you are aware that there have been recent downward trends in the share market, in fact, in the last month, the ASX200 has dropped 5.97%. In times like this, you may wonder whether it is a good time to sell. But this is often at the detriment of your long-term wealth.

In fact, selling investments such as shares during a market downturn can have significant negative consequences, particularly in the context of long-term retirement balances, due to sequencing risk.

Sequencing risk refers to the risk that the order or sequence of investment returns will negatively impact an investor's overall return.

When investors sell their investments during a market downturn, they lock in losses, which can have a long-term impact on their retirement savings.

For example, suppose an investor has a retirement portfolio worth $1 million, consisting of 60% stocks and 40% bonds. If the stock market experiences a 20% decline, the value of the investor's portfolio would drop to $800,000. If the investor sells their stocks to avoid further losses, they will lock in the loss and miss out on any potential rebound in the market.

Furthermore, if the investor is retired and relies on their portfolio for income, selling stocks during a downturn can deplete their retirement savings faster than anticipated, leaving them with insufficient funds to cover their living expenses in the future.

It's important to note that market downturns are a normal part of the economic cycle, and we should expect to experience them over the long term. Trying to time the market and sell investments during a downturn can be a costly mistake, as it is nearly impossible to predict when the market will bottom out or recover.

Therefore, the best strategy for long-term retirement investing is to remain invested in a diversified portfolio and maintain a long-term perspective.

By staying invested, investors can capture the market's long-term returns and avoid locking in losses during short-term market fluctuations. Additionally, rebalancing the portfolio periodically can help manage risk and ensure that the portfolio remains aligned with your long-term goals.

If you are concerned about current market conditions and need some detailed financial advice, speak with your financial adviser.

Note: The material and contents provided in this article are informative in nature only. It is not intended to be advice and you should not act specifically on the basis of this information alone. If expert assistance is required, professional advice should be obtained.