Friday, October 10, 2008

Historical perspective on current market downturn

I'm growing tired of the daily hysterical headlines about the share market. It's in the interests of both the media and politicians to create a sense of unprecedented crisis - it sells media output and shores up incumbent politicians.

Here's the Australian "All Ordinaries" index for my lifetime, plotted quarterly with a logarithmic y axis:

Picture 2.png

So far the current downturn really doesn't look too bad in context.

The standard advice given to investors is:

  • Stay in for the long term

  • Have a diverse portfolio

When share prices drop, you only lose if you have to sell right now. Dividends normally keep coming in.

If you only have shares in banks you should be concerned.

Taking an analogy from a recent Qantas flight that dropped 1,000 feet due to an iPod being left on (just kidding), it would be much more serious if the plane was at 2,000 feet than it was with the plane at 37,000 feet.

Likewise, we should look at the market in proportional, historical terms.

1 comment:

Christopher said...

Here, here.

The crisis is directional proportional to media coverage. As soon as the media get bored of reporting this event (very soon now) the market will have a chance to recover.

Kind regards,