Billions wiped off share markets – Where did the money go? Is it really lost?
After a pretty average September on both local and global share markets, October and November (so far) caused even more carnage in investor portfolios and saw many a speculative trader being burnt.
At the time of writing, we are 10.9% below the high of around 6,457 points on the ASX 200, reached recently at the end of August 2018, and taking us back to October 2017 levels – effectively wiping out capital gains for the last 12 months. News headlines such as “Australia’s Housing Market Crash” and “ASX plunge wipes $50 billion off share market” have dominated business news in recent months. Oil has plunged nearly 8% on Black Friday and even Bitcoin has not been spared, dropping below US$4,000 per coin after reaching a high of US$19,843.11 in December 2017.
The sell-off didn’t come as a surprise given the strong run equities have had, especially in the US, but the depth and speed of the sell-off has certainly surprised many. Although the reason(s) for the sell-off is beyond the scope of this article, many economists and financial analysts lay blame on the Trump Government’s policies and US corporate debt, Brexit, a slowdown in Chinese economic growth and hedge fund trading – to name but a few.
So, with the media reporting that the share market has ‘lost’ billions of dollars – what happened to all that money and where did it go? Is it really lost?
The answer is that it is purely a book figure – a ‘paper loss’ or ‘unrealised capital loss’. There is no magical drain other than the metaphorical one to explain this economic concept.
Imagine a real estate agent estimated the value of your home as $450,000. Next week a second agent estimates it would sell for $400,000. Have you lost $50,000? No, even though no money has changed hands, you may feel poorer. This is the difference between value (what someone may be prepared to pay) and the price at which a sale actually happened.
It’s the same with the share market. When there are more buyers than sellers, the price of a share increases and holders of that share feel richer. Conversely, when there are more sellers than buyers, share prices fall. The holder of the devalued shares has not actually lost any money – unless they sell the shares and realise the loss.
Share speculators get burnt by rapid changes in value because they want to realise short-term profits. Long term value investors hold on to their shares in quality companies throughout price fluctuations because they believe in the future of the business and the flow of future dividends – and may even add to holdings in a market downturn as value emerge in quality companies again.
The secret is to follow your investment strategy and not the headlines. As billionaire investor Warren Buffett stated:
“Price is what you pay. Value is what you get.”
In other words, don’t focus on short-term swings in price, focus on the underlying value (quality) of your investment. At MK Wealth Solutions, all of our clients have a long term value based investment strategy in place – meaning we invest our portfolios according to the financial and personal objectives of our clients, in a range of diverse and quality assets and in line with the client’s personal risk profile. By following this strategy, we don’t need to realise capital losses unless something fundamentally changes in terms of the underlying investment. As such, investors can sleep sound at night knowing we are building a high-value long term investment portfolio, and short term fluctuations and sell-offs such as what we’re experiencing at the moment, are a normal part of investment markets.
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MK Wealth Solutions is a Corporate Authorised Representative No 100223 of Synchron ABN 33 007 207 650 AFSL 243313. The information provided in this article has been provided as general advice only. We have not considered your financial circumstances, needs or objectives and you should seek the assistance of your personal financial adviser before you make any decision regarding any products mentioned in this article. Whilst care has been taken in the preparation of this material, no warranty is given in respect of the information provided and accordingly neither MK Wealth Solutions and Synchron, nor its related entities, employees or agents shall be liable on any ground whatsoever with respect to decisions or actions taken as a result of you acting upon such information. Any general tax information provided in this publication is intended as a guide only and is based on our general understanding of taxation laws. It is not intended to be a substitute for specialised taxation advice or an assessment of your liabilities, obligations or claim entitlements that arise, or could arise, under taxation law, and we recommend you consult with a registered tax agent.