If you own ASX shares, you may be worried about the current bear market. Over the last month, the S&P/ASX 200 Index (ASX: XJO) has fallen 2.41%. At one point in the month, the index fell to its lowest point since May.
Shane Oliver, Head of Investment Strategy and Chief Economist at AMP Ltd subsidiary AMP Capital has revealed 7 investment strategies you should know when facing a potential market correction.
Let's take a closer look.
What investors need to keep in mind
Oliver says a range of reasons is to blame for recent downturns across the globe. These include worries of slowing growth due to the rise of the Delta variant of COVID-19, the tapering of monetary stimulus by central banks, and, more recently – problems at Chinese developer Evergrande. Oliver says a potential collapse of the developer could have ramifications for "the Chinese economy, global growth, and commodity prices (like iron ore)."
But while share market pullbacks can be painful, they are healthy as they help limit complacency and excessive risk-taking. Related to this, shares climb a wall of worry over many years with numerous events dragging them down periodically.
Bouts of volatility are the price we pay for the higher longer-term returns from shares.
With that in mind, here are 7 tips Oliver says investors, such as those in the ASX 200, need to keep in mind.
Oliver's 7 tips for investors in ASX shares
- Corrections are normal and healthy
Markets have had big downturns in the past, such as in the early 2000s dotcom bubble, the 2008 global financial crisis, and more recently, the COVID sell-off of March 2020. Oliver says September is usually the weakest month for both US and ASX shares, with 50% of Septembers in the US and 70% of Septembers in Australia ending lower over the last decade. - The main predictor of a "major bear market" is an impeding recession
Oliver doesn't see one happening soon. He is forecasting global growth to be 4% in 2022. Vaccines are helping ease the economic uncertainty, especially in Australia where a technical recession should be avoided. The Evergrande situation seems to be settled for now as well, which has also allayed fears. - Don't sell shares as soon as they go into the red
As Oliver puts it: "selling shares … whenever shares suffer a setback just turns a paper loss into a real loss with no hope of recovering." It's almost impossible to know when the market will recover. Stick to a long-term plan when buying ASX shares. - Buy low
When markets dip, it can be an opportune time for investors. While Oliver concedes it's impossible to precisely time the dip, but a fall in the average moving price is a good indicator. - Share dividends are better than savings rates at the moment
Dividends in commodity shares like BHP Group Ltd (ASX: BHP) may have peaked with the price of iron ore, but a well-diversified portfolio is "likely to remain attractive, particularly against bank deposits." - Shares often bottom at the point of "maximum bearishness"
When sentiment seems to be most pessimistic, you should buy shares. When its most optimistic, it may be time to sell. - Turn down the noise
Ignore small fluctuations and day-to-day news coverage. Oliver says negative news can reach "fever pitch" and only lead to more panic. The investor's best bet is to make a long-term strategy and stick to it.
