The recent volatility in the Australian share market is typical of what can happen in investment markets.It’s part and parcel of being an investor and, as long as you have high quality investments and you are a long term investor, it is usually nothing to worry about.
In fact, all investment markets suffer from volatility. Even a high-security investment like bonds can give you a negative return from time to time, as shown below.
What is investment volatility?
Investment volatility is the risk of the value of your investment moving up and down. With high quality investments, their values should move up more than they go down.Investments which are expected to product higher long term returns (such as shares) tend to experience higher levels of short term volatility. On the other hand, investments which are expected to generate lower long term returns (such as bonds) usually experience less volatility in the short term.
This can be seen in the charts below which show the range of historical returns for various asset classes over various periods, as well as their long term average returns (after inflation)As you can see, the longer your hold your investments the less they are affected by volatility.For example, the range of returns for Australian Shares in any single year has been -42.6% to 58.2%. However, the range for 10-year periods has been 2.9% to 14.6% p.a.