ASX fall: Harsh reminder that diversification is key

Posted: 8 February 2018 2:08 pm

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In a volatile market, traders are reminded to diversify their portfolio and focus on the long term.

It's been a chaotic few days for share markets around the globe, with the Australian Securities Exchange (ASX) shedding an estimated $90 billion over Monday and Tuesday alone. Tuesday was reported as being the worst day for Australian shares in over two years, with the ASX falling by more than 4% and the share prices of major financial companies, including the Big Four banks, the hardest hit.

Nervous local traders, watching the value of their share holdings diminish before their eyes, engaged in a bit of a selling spree, which in turn likely drove share prices down even further in a vicious cycle fuelled by panic and uncertainty. Australian traders have been extremely fortunate to ride the advantages of a bull market for many years now, so it's not surprising the sudden fall sparked widespread fear and concern.

Diversification is key

The local market, while climbing back up, is still in a volatile state, and no one can predict exactly what it will do next. But there is one thing experts can all agree on: it's best not to leave all your eggs in one basket.

CEO of online investment platform Stockspot Chris Brycki told that market dips are a normal part of trading. "In 2017, we saw a long period of share markets around the world rising with very few bumps along the road. This is uncommon. Whether you're a new or experienced investor, it's easy to get spooked in market falls. It's important to remember volatility is a normal part of the market. If you stay patient and focus on the long term, market dips should worry you less."

Brycki stressed the importance of a diversified portfolio to help ride out market waves, and discussed how Stockspot has constructed its portfolios with diversification top of mind. "In November 2017, Stockspot made some changes to its portfolios and increased the allocation to defensive ETFs and reduced share market ETFs. We took this pre-emptive step to help protect our portfolios against potential market volatility in 2018. We believed it was prudent to reduce risk and make the portfolios slightly more conservative.

"Stockspot is the only online investment adviser and fund manager in Australia to hold the Gold ETF in our client portfolios and it has proven to be a good cushion and diversifier on days when share markets fell. For instance, when markets fell on Monday this week, the Gold ETF rose 2%," said Brycki.

Look outside of Australia

Matt Leibowitz, CEO of Australian fintech Stake, the online shop for US shares, said local traders should also be looking to diversify outside of Australia. "When markets look shaky, Australians have two options — you either sell or hope. Yet at a global level, traders have access to returns when markets go up or down. For those who have access to the diverse range of products in the US markets, the ability to profit from a downturn is very real."

The Australian share market only represents around 2% of the world's shares, yet Australian traders remain heavily focused within our shores. It really comes down to a numbers game. "Boiled down to raw figures, there are just three ETFs available to get short exposure to markets on the ASX, compared to more than 130 inverse ETFs on US markets. For those who stay focused on Australian shores, they’re missing a huge opportunity to make money when markets fall," he said.

"It might come as a surprise, but Australians can win as markets crumble. They should be aware of their options to trade in any direction and not be trading with one arm tied behind their back," said Leibowitz.

Advice for local traders

Chris Brycki said market dips such as what the ASX experienced on Monday and Tuesday this week, while nerve-racking, can also be a good opportunity for experienced traders to buy low, and for new traders to enter the market. "Markets dips present an opportunity for long-term investors to top-up while prices are lower or rebalance their portfolios. If investors are concerned about buying before a market fall, they can invest smaller amounts of money on a regular basis to pay an average price for their investments. This is known as a 'dollar cost averaging' investment strategy."

On Thursday morning, Citi delivered its annual market outlook for 2018, presented by head of investment strategy for Citi Private Bank in Asia Pacific Ken Peng and attended by Peng said the bank expected further, positive economic growth globally for 2018, along with increased market volatility compared to the previous year.

In anticipation of further volatility, Peng said traders "should have a balanced, global, well risk-managed asset allocation." He advised traders to look for "technologies that are changing the way we live and do business" such as robotics, artificial intelligence (AI) and bio-technologies.

Peng's last piece of advice was a reminder that trading is a long-term game, saying "When you identify the right trends, be patient."

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