History has shown us that markets tend to recover just as quickly as they fall, just as we saw in 2009 when the Australian sharemarket enjoyed a signifi cant recovery from March through to December.
Let's look at two investors to ask the question; "After one year, did staying the course make sense?" The orange line in exhibit one shows the growth of a $10,000 sample 70/30 balanced portfolio from 1 January 2003 until the end of 2009. The chart shows what happens to the portfolio's value as the result of two different scenarios:
Investor 1: This investor kept their cool and decided to stay the course, making no changes to their investment strategy. At the end of 2009, their balance would have been $15,728.
Investor 2: This investor panicked and switched their investment to cash.
Unfortunately for them, they chose the wrong time – when the market 'bottomed'. By switching to cash, the investor missed out on the market rebound. That's the problem with trying to 'time' the markets; you never know when the market has peaked or troughed. This investor's money was now worth only $12,761 at the end of December 2009; a difference of nearly $3,000.
About this chart: The diversified portfolio is hypothetical only and is calculated by a weighted average of the asset class index returns shown in accordance to the following asset allocations. 70% Growth portfolio consists of: 32% Australian Shares, 25% Australian Bonds, 5% Cash, 20% International Shares, 10% International Shares $A Hedged, 8% REITs. Sources for the asset are: Australian shares: S&P/ASX 300 Accum Index; Australian bonds: UBS Warburg Aust Comp Bond Index. Cash: UBS Warburg Bank Bill Index. International shares: MSCI World Net Div Reinvested Accumulation Index (A$) and International shares hedged: MSCI World Net Div Reinvested Accumulation Index $A Hedged. REITs: S&P/ASX 300 Property Accumulation Index.