The notion of Share Market volatility can conjure up fascination and anxiety. To unsuspecting investors the prospect of your investment moving up and down in a given day, hour, minute, or second can be unnerving.
When compared to Cash, the stability of Shares comes into question. Cash is often held on the pedestal of capital stability, but how risky has Cash been as an investment?
Share Markets over a given 12 month period often display huge price movements, which translates into volatility. The measure of volatility from an investment perspective does not delineate price movements that are up, or down, meaning that a Share that increases or decreases is still regarded as volatile, even though you might be making money.
‘The Cash Trap’ as it’s referred to, has been the silent killer for investors when it comes to volatility. A Cash investor has seen their returns crushed over the last 20 years. Depending on the interest-bearing product of the day, Cash returns are down by as much as 95%.
In the year 2000, I may have been able to get 6% on 12 Month Term Deposit, today a 12 Month Term Deposit might cough up 0.50% over 12 Months, this represents a reduction in income/interest of over 90%, all the while my original investment remained free of that dreaded volatility…
As a comparison, Shares have remained historically volatile and ‘scary’. Zooming out for a moment, an investment into Australian Shares over the same 20 year period has yielded a capital base that has at least tripled, as well as an income stream in the form of Dividends that has also closely followed suit.
In the quest to understand Risk and volatility, it’s important to observe the facts and consider investing with an additional layer of consideration, one that not only observes the capital base – the value of the investment – but also the income it pays over time – Interest or Dividends. By understating these facts, an investor is better armed to manage volatility and take advantage of it, ensuring investment success.
You need to consider with your financial planner (or adviser), your objectives, financial situation and your particular needs prior to making an investment decision. Sensibly Pty Ltd and its authorised representatives (or credit representatives) do not accept liability for any errors or omissions of information supplied on this website
Nick Shanley, Steve May, Luke Styles and Shanley Financial Planning T/A Steve May Financial Services are Authorised Representatives / Corporate Authorised Representative of Sensibly Pty Ltd, AFSL 533923. Please refer to our website at www.stevemayfs.com.au to reference our Financial Services Guides.
