Why you shouldn’t panic when share prices fall

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For almost all of us, the bulk of our Superannuation is invested in the share market, whether that be locally or overseas. In my experience a lot of people don’t really understand what is entailed with investing in shares. This lack of understanding leads to a lack of confidence. A lack of confidence leads to panicked behaviour when markets fall.

When you purchase a share, you are literally buying a share in the ownership of that company. You become entitled to a share in the profits by the way of a dividend. Your Superannuation fund is likely to hold a wide range of shares in different companies in varying sectors and locations. Most Super funds are likely to focus on the largest companies primarily but it is possible that you will have exposure to some small companies as well.

The stock market is effectively a daily auction of all the listed shares, big stocks like Commonwealth Bank or Woolworths have literally millions of dollars’ worth of trades every hour, smaller companies are traded less often. The value of these shares fluctuates greatly on a daily basis.

These changes of valuations flow through to our Superannuation balances, which also fluctuate quite a lot on a daily basis. When these shares trade for less than they did a few months ago, and we see the value of our Superannuation drop, quite often this causes concern for clients. Again, concern leads to panic, and panic leads to bad decisions.

We all know the age old cliché with the stock market, buy low and sell high. Unfortunately many people do the exact opposite. Mostly due to not fully understanding what they own. We all know that the value of a house is irrelevant unless we are looking to sell.

The same is true with shares. If we have no intent in selling our Commonwealth Bank shares or our Woolworths shares, does it matter what price they went for at auction yesterday? If we still think Commonwealth Bank and Woolworths are good companies and will continue to be profitable and have no intention in selling the shares, it literally doesn’t matter what the share price is today. Much the same as it doesn’t matter that the value of your house dropped 10 per cent last year if you aren’t planning on selling.

Problem is that many people see the share price fall and panic, and sell their shares exactly at the wrong time.

When you see the value of your Superannuation fall because the stock market went backwards, remind yourself what you actually own is a small percentage in number of large companies. Comfort yourself with the fact that they are still good companies, and are likely to keep making money, keep paying you dividends and the price they sell for today is largely irrelevant in building your long term wealth.

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