Focus on the hill not the yo-yo

cartoon on hill with yoyo-951The financial markets took a tumble over the past month and have since recovered much of what was lost. However, many in the media largely focussed on the share market falls, talking it up as being catastrophic and unprecedented and warned of impending doom and gloom. However, the recent market fall (technically called a correction) is perfectly normal and historically occurs when markets have risen substantially and are then regarded as being expensive.

Markets take a breather and overpriced stocks are sold. This often weakens investor sentiment and other less expensive stocks are also sold. Technology is heightening these swings as we now have large fund managers, and all manner of leveraged traders, who are buying and selling to speculate on these ups and downs. This is now part of normal market behaviour.

What is not usual is the massive 9-10 year upward rise in share markets that have been experienced since the end of the GFC. New Zealand has only experienced this length of continuous rise in values three times in the past 120 years. We are now entering a normal period of market volatility where we will see more ups and downs in market value over the next 12 months.

Financial advisers often use an analogy to explain market volatility. They relate market ups and downs to being a bit like a person walking up a gradual hill playing with a yo-yo. The hill is your gradual increase in wealth to achieve your financial goals while the yo-yo relates to the short-term market ups and downs which occur along the way. The media tries to get you to concentrate on the yo-yo going up and down, when you should step back and see a person walking up a gradual hill.