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Financial markets year in review 2018

Lessons from a volatile year

As 2018 comes to an end, we look back on a year that turned out to be quite challenging for investors.

Rising interest rates, slowing growth and political turbulence all contributed to a volatile time in financial markets. We take a look at share markets, oil and house prices, and what it all means for you.

Shares were the hardest hit, especially in emerging markets where returns were negative. Developed markets weren’t quite as bad but look like finishing the year down also.

Government bonds benefited from the higher uncertainty with positive returns. For a balanced investor with a diversified portfolio, this meant that their fixed income portfolio helped to offset some of the volatility in shares.

The Australian dollar tends to fall when investors are concerned about the outlook for global growth. By end November, the Australian dollar had fallen by 6.4% from the start of 2018. This helped to boost returns to portfolios with unhedged overseas assets.

Roller coaster ride for share markets

Shares got off to a good start to the year, with strong returns in January but this was followed by a sharp drop in February, which caught a lot of investors by surprise.

Markets then resumed their upward trend until October and November brought further volatility. The popular growth stocks that had led the market surge earlier in the year, declined the most when volatility hit, with Facebook, Apple and Google all coming off by more than 25% from their 2018 peak.

This is a classic example of how chasing past returns can lead to your portfolio being more exposed to losses when the market turns. If you’re not diversified and you’re forced to sell assets when markets have fallen, it could be very damaging to your long-run sustainable income.

Take only as much risk as you need

We’ve come out of an environment in the last few years where economic growth surprised on the upside, and returns for growth assets like shares were strong.

Let’s take a look at the big picture.

History tells us the bull markets can’t last forever, and looking back at the performance of shares over the last 12 years, puts this into perspective. Periods of above average returns, tend to be followed by periods of below average returns.

Making sure your portfolio is diversified, and taking ONLY as much risk as you need to… allows you to ride out the periods of uncertainty.

Over the long run, you probably need to have exposure to risky assets because that’s how your money grows.

Making sure your portfolio is diversified, and taking ONLY as much risk as you need to, is important, because this is what allows you to ride out the periods of uncertainty and stick to your long-run strategy.

Oil bucks the trend

Another big reversal that came in October, was in the oil market.

The oil price had been rising steadily for most of the year, hitting a high of US$77 a barrel in early October. Two months later the price has dropped to around US$50 dollars a barrel, sparking calls for OPEC to cut back on production to shore up the price.

Stating the obvious, a lower oil price is good for consumers, and should also help to keep inflation in check.

House prices have declined, RBA on hold

After a period of very strong returns, Australian house prices have begun to fall due to tougher borrowing conditions. In Sydney and Melbourne prices have come down by 10% and 5%, and analysts are predicting the falls to continue through 2019.

So long as unemployment stays low, it’s likely that the decline in house prices will remain gradual, although clearly in some pockets there will be more distress. But Australia’s high level of household debt is a potential source of fragility, and it probably means the Reserve Bank of Australia will need to keep interest rates low for some time yet.

Stay invested for the long term

While looking back at the gains that markets have enjoyed over the past decade helps put the recent volatility in perspective, 2018 has certainly felt like a change of pace.

Having taken the time to develop a financial plan, it becomes much easier to deal with periods of uncertainty.

Your financial planner can help you make sure your portfolio is well diversified and appropriate for your needs. Having taken the time to develop a financial plan, it becomes much easier to deal with periods of uncertainty, because it’s usually better to stick to your strategy and remain invested for the long run.

We wish all of you a safe and happy festive season.

Aware Super Pty Ltd ABN 11 118 202 672, AFSL 293340, the trustee of Aware Super ABN 53 226 460 365. Financial planning services are provided by our wholly owned financial planning business Aware Financial Services Australia Limited, ABN 86 003 742 756, AFSL No. 238430.
This information is of a general nature only and is not specific to your personal objectives, personal situation or needs. Before making any decisions based on this information you should consider its appropriateness to you. Every effort has been made to ensure the information is accurate. We strongly recommend that you consult a financial planner before taking action and review the relevant Product Disclosure Statement.
Past performance is not an indicator of future performance and future performance is not guaranteed.

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