Is it safe to go back in the water?

It’s well known that we humans feel a loss far more than we feel a gain of the same degree. So the past weeks have been particularly agonising for those of us invested in the share market. If this latest fall was a one off it may have been bearable, but it was just a few short years ago that we experienced a similar painful drop. Do we still have the nerve to dive into the turbulent waters that is the stock market? And do we need exposure to this volatile asset class in our portfolios at all?

Many investors will, understandably, take their money and run…onto dry land and into the relatively safe havens of term deposits and bonds. Capital protected and not a bad return - when the interest rates are 6%. But these assets are not the Holy Grail they may appear. While interest rates are high, yes it makes a compelling alternative to the growth assets of property and shares. But, (and there’s always a but!), we’ve spoken about the link between investment return and risk, and therein lies the rub with the so-called “safe” assets. Lower risk equals lower return in the long run. Cash and fixed interest securities do not provide capital growth, only income, and therefore are not wealth building assets.

For those with time on their side, ie: not retired or about to retire, the investment horizon is long term indeed, so we need to continue to actively grow our capital bases. That means not running for dry land, but rather holding our breath and going in for more. Taking the plunge involves courage and the realization that although there will be ups and downs, history has shown us the share market delivers over the long term. The long-run expected return from the ASX is around 9.5%, which is made up of a combination of dividends and capital gain. Over time this is materially higher than returns from defensive assets, because of the higher risks involved. The higher return ensures that our nest eggs are not eroded by inflation, but are hopefully growing over time.

Those of us closer to retirement still need some exposure to growth, but will be invested more conservatively. Dipping the toes is a sensible route to go – still refreshing but not an all out assault on the senses. Chat to your adviser for individual advice for your circumstances, but don’t put away your swimmers just yet.