While share market corrections are scary, they are in fact normal and welcomed by long term savvy investors. I also understand that if you are highly leveraged and investing in high risk speculative shares you probably won't share my optimism. The same too for those fully invested and rely on their investments to generate an income however a well diversified asset allocation is designed specifically to dampen the volatility of single asset classes i.e. weather the storm.
The following are my 10 reasons why and how share market corrections are good for everyone especially investors.
- Many discretionary items will be cheaper i.e. travel, cars and electronics. Why? Because sellers need to sell to survive and they will discount stock to maintain volume in trying to ride out the consumer pull back in spending.
- If you have shares and a dividend reinvestment plan your dividends will be reinvesting/ buying you shares at a lower price i.e. buying more for your dollar. Often a correction is a discount of share price, not a drop in dividends.
- As a dividend return on investment investors dividend returns will increase. If a company’s dividend remains unchanged at $0.50 and the share price drops from $10.00 down to $5.00. Buying the share at $5.00 the dividend return will have increased from 5% to 10%.
- Your regular contributions into your super i.e. SGC (Super Guarantee Contribution) and Salary Sacrifice will buy more for your contribution dollar. So with more shares and when the share market rises in the future (as it always has) you will have more shares and they will be worth more.
- To stimulate economies and keep money circulating in the economy governments and central banks often lower interest rates and provide fiscal stimulus to the markets. i.e. they provide a capital injection to support business and slow further downside.
- It sorts out the pack. As they say a rising tide lifts all boats however when the tide goes out it reveals who’s not wearing bathers. Good quality companies, with good management and good process not only survive corrections, they go on to thrive post the correction because of less competition.
- You may have the opportunity to minimize tax. If you unfortunately do realize a loss, this loss may be carried forward to offset future capital gains and minimize your future capital gains tax.
- Nearly everything on the share market is sold down. This opens up asset miss pricing and the opportunity for investors to buy great companies at discounted prices.
- If we observe historical share market charts most gains in share prices and markets occur within the first six to twelve months post a correction while longer term valuations are factored back into share prices and market valuations.
- The last reason is increased investment confidence. Generally speaking if you are investing into a good company (increasing ROI- Return on Investment, good management, competitive advantage, low debt etc.) and the share price has come down significantly. The probability of the share price going down significantly further is often less than the probability of the share price increasing in value i.e. capital loss downside is less.
General Advice Disclosure
Sources of this information are considered to be reliable but are not guaranteed. Information published in this article has been prepared for general information purposes only and not as specific advice to any particular person. Any advice contained in this document is General Advice and does not take into account any person's particular investment objectives, financial situation and particular needs.
Peter Horsfield in an Authorised Representative and Investsure Holdings Pty Ltd ABN 16 050 286 630 as trustee for Horsfield Family Trust ABN 55 609 068 513 is a Corporate Authorised Representative of Infocus Securities Australia Pty Ltd ABN 47 097 797 049 AFSL and Australian Credit Licence No. 236523