Mark Lister: Market volatility is the price we pay for long-term returns

The market slump is more likely a typical market correction, rather than the start of another 2008. Photo / AP

COMMENT: Last Thursday the local sharemarket had its worst day in almost a decade, and despite a rebound the following session, it ended the week sharply lower.

The big question is whether this is another short-term blip, or the start of something more sinister. Nobody knows for sure, not even us supposed experts.

Things could absolutely get a lot uglier, given the long list of worries. Interest rates in the US are rising rapidly, China is looking shaky, debt levels are too high, and trade tensions are worsening.

Then again, a few things could go right. The world's biggest economy is in the best shape in decades, which makes it tough to see the wheels falling off completely.

The US midterm elections could come and go without fuss, Trump and his Chinese counterpart might still get round the negotiating table, and a Brexit deal is still possible.

The global earnings season is also upon us, so if the heavyweights can impress investors like they have during the last two quarters, the rally could be back on.

We've seen a bit of that over the last few days, with Netflix in particular silencing some doubters with a very strong result.

My guess is this is a garden-variety market correction, rather than the start of another 2008. We have decent economic fundamentals on our side, and despite the sharp rise, US interest rates aren't yet high enough to choke off activity.

Having said that, this volatility is not something we should ignore. Markets have had an exceptional run as the world has enjoyed steady growth, non-existent inflation and the lowest interest rates in history.

That's a goldilocks backdrop for investors, but it won't last forever. Last week should serve as a reminder the next few years could be much more challenging than the last few.

Whether that's something to worry about or not depends on your situation.

If you're close to retirement and planning to call on your nest egg over the next few years, it's probably a good time to review your investments. The same goes for those with a big withdrawal coming up, maybe for a wedding or house deposit.

However, if you're younger or you have a long-term investment horizon, you can afford to be a lot more relaxed. Confident, in fact.

There have been eight bear markets (falls of more than 20 per cent) in US shares since 1960. That's roughly one every several years, so you may as well prepare to experience a few during your investing journey.

Accept that this volatility is part of the cycle, and learn to see it as an opportunity. These ups and downs are simply the price we pay for superior long-term returns.

They are also the best opportunities you'll get to buy quality assets at bargain prices. Ask anyone who held their nerve and stuck to the game plan through the GFC years. They will have been extremely well rewarded since.

Personally, I'm hoping the volatility sticks around for a while yet and that prices fall further, at least until my next KiwiSaver contribution comes out.

What use is a good bout of panic if it doesn't last long enough to take advantage?

- Mark Lister is Head of Private Wealth Research at Craigs Investment Partners. This column is general in nature and should not be regarded as specific investment advice.