Local investors have been taken on a wild ride recently.
After recently closing at its highest point since early 2008 the market has lost a staggering 7.8% and is now hovering just above the 5,500 point mark. It has fallen in each of the last four sessions and is trading 69 points, or 1.2%, lower today and is just 2.2% away from falling into a "technical correction".
That's something that each of the Big Four banks have already done. All four of Australia's major banks have fallen by more than 10% since their respective highs – meeting the definition of 'technical correction' – with Westpac Banking Corp (ASX: WBC) and National Australia Bank Ltd. (ASX: NAB) leading the way with a 22.7% and 17.1% fall, respectively.
Commonwealth Bank of Australia (ASX: CBA) and Australia and New Zealand Banking Group (ASX: ANZ) haven't fared much better. The pair are down 16.7% and 15.3% respectively and have both fallen 1.1% today alone.
Given that the banks have done so much of the market's heavy lifting in recent years, investors are justifiably nervous about the state of the sharemarket. Despite their recent falls, the banks remain overpriced and could be set for even further pain unless the Reserve Bank gives into the market's demands, cutting interest rates below their current low of 2%.
Unfortunately (for the banks' investors at least), yesterday's GDP, or gross domestic product, numbers didn't quite justify further easing in monetary policy just yet which is likely one of the reasons the market has fallen so heavily today and yesterday. That's right – it appears that good economic news is no longer seen as good news for the stock market, highlighting just how irrationally priced some stocks, including the banks, had become.
At the same time, investors remain hesitant in investing their hard-earned wealth in the mining sector. Although commodity prices have strengthened recently, most analysts seem to expect the surges to be short-lived which would suggest more pain over the horizon for the miners themselves, including BHP Billiton Limited (ASX: BHP) and Rio Tinto Limited (ASX: RIO), which are two of Australia's largest companies by market capitalisation.
What should investors do?
Investing in the stock market is by no means risk-free even at the best of times, but can be downright terrifying when the market gets stuck in a rut like it has over the last six weeks or so. It can also be extremely tempting to take your money off the table and throw it in any old savings account, just so long as you no longer have to worry about it losing value on the markets.
But there are a number of problems associated with such a decision. First of all, selling your shares will bring rise to brokerage fees, as well as capital gains costs (provided that they have grown in value), which will obviously increase your tax liabilities. Meanwhile, investors have a tendency to 'get out' while the going is tough, only to buy back in when shares have recovered in price (hardly a logical move when you sit back for a moment and think about it rationally).
Instead of panicking and selling out at a loss, there are a number of steps you can take to prepare yourself for further pain to ensure you're one of the 'smart investors' who doesn't let their emotions control their every move. To learn how you can cope with the market's volatility, simply read on below.
