How to take advantage of the $3 trillion sharemarket meltdown

Interest rate rises are causing stress – but a financial adviser has tips for anyone who wants to take advantage of the sharemarket during a meltdown.

Through 2022, the Reserve Bank of Australia (RBA) has started raising interest rates and the sharemarket has been battered as a result, with over $US3 trillion ($A4.3 trillion) wiped off the value of the US sharemarket alone.

But where are markets going from here? And will the stock market bounce back?

What’s driving this downturn?

The biggest headwind impacting global share markets today is interest rates. But, rising interest rates are simply a response to current economic conditions, specifically high inflation globally which is the real underlying problem.

The economics of this gets pretty complicated pretty quickly, but the short version is that high inflation is bad and central banks like the RBA want and need to get this under control. The only real tool the central banks have at their disposal to achieve this is interest rates. So they raise interest rates, and the economy generally suffers as a result.

When interest rates are higher, people generally spend less. This means less profit for companies and in turn this reduces the performance of their shares. At the same time, most companies carry some debt to fund their operations – so higher interest rates mean they need to spend more on interest costs, further negatively affecting their profitability.

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Reserve Bank of Australia (RBA) has started raising interest rates. Picture: Muhammad Farooq/AFP

Market trends

Through the course of 2022 we’ve seen the Australian share market is down by an eye watering 16.6 per cent. That being said, the Australian market has held up better than it’s global peers, with the US S&P500 down 23.39 per cent, the tech heavy US Nasdaq index is down 31.8 per cent for the year to date – with both now officially considered to be in a ‘bear market’ after a loss exceeding 20 per cent.

We know that bear markets happen, with nine official bear markets being recorded since 1980. But we also know that after periods of decline, markets generally enter their strongest growth periods.

For example, in the bull market run following the two most recent bear markets in 2008 and 2020, we saw two huge periods of strong growth.

Following the 2008 global financial crisis, we saw an 11-year bear run where the value of the sharemarket increased by 342 per cent. And following the 2020 Covid market meltdown, we saw an increase in markets of 126 per cent in less than a year.

If you were sitting on the sidelines during these periods, you would have seriously missed the boat.

The Australian market has held up better than its global peers, with the US S&P500 down 23.39 per cent

How to make smarter money choices in the current market conditions

It sounds like a lot of doom and gloom, but for smart investors in the right position now it’s the time to take advantage of the current conditions to profit. Downturns make millionaires, and while we don’t have a crystal ball we know that markets always recover from downturns to a stronger position than they went in – it’s only a matter of time.

Timing the market is futile

In periods like the one we’re seeing at the moment, I always get a lot of questions from investors talking about whether and how they should be changing their investment strategy to take full advantage of the current market conditions.

Our inner investor goes into overdrive, and we get caught up thinking about all the money we’re going to make – the psychology of a downturn is hard to escape. But history has shown us that picking the perfect time to invest is almost impossible, and the more tricky you try to get as an investor the higher your chances of losing become.

Even the professional investors can’t ‘time’ the market well and consistently, with statistics showing they get it wrong more than 94 per cent of the time. In my opinion, trying to do this yourself is a futile endeavour that’s likely to lead to you costing yourself a heap of money (and causing a lot of stress in the process).

Choose investments that fit into your broader money plan, not just investments that are good in absolute terms.

Smart investing in a down market

While it’s almost impossible to time the market, there are three key things you can do to make smarter investment choices while the markets are going through periods of turbulence.

First thing is choosing solid investments, only looking to invest with good, strong companies that are well placed to make it through to the other side of this period of turbulence.

The second is being smart with your investment planning. You should choose investments that fit into your broader money plan, not just investments that are good in absolute terms. You want to have a good plan going into your investing that you can follow through regardless of the short term market conditions.

And the third is making sure that you’re never forced to sell investments at the wrong time. You only ever lose on an investment when you sell it, so if you’re never forced to sell at a time that doesn’t make sense, you can hold your good investments until they deliver you good results.

Get these three things right and you’ll be well placed to coast through these market conditions and come out the other side in a stronger position.

The wrap

No one can predict the future of the sharemarket, but there are a few things we can be sure of. The sharemarket will continue to be volatile and there will be ups and downs. We also know that good companies will continue to do good business, and that economies will grow.

This creates an opportunity for smart investors with a solid approach to take advantage of this uncertainty and come out the other side in a better position.

Ben Nash is a finance expert commentator, podcaster, financial adviser and founder of Pivot Wealth www.pivotwealth.com.au, and Author of the Amazon Best Selling Book ‘Get Unstuck: Your guide to creating a life not limited by money’. www.getunstuckbook.com.au

Ben has just launched a series of free online money education events to help you get on the front financial foot. You can check out all the details and book your place here.

Disclaimer: The information contained in this article is general in nature and does not take into account your personal objectives, financial situation or needs. Therefore, you should consider whether the information is appropriate to your circumstances before acting on it, and where appropriate, seek professional advice from a finance professional.

Originally published as How to take advantage of the $3 trillion sharemarket meltdown