Defence in a downturn: buy more shares or switch to cash?

Investors worried about more stock market falls are considering defence strategies, but experts have a word of warning.

Volatility in global financial markets has left Aussie shares just a few bad days away from an official correction, and investors are considering defence strategies.

After hitting an 11-month low last week, the S&P/ASX 200 index recovered slightly but has remained about 8 per cent below its February highs.

A correction – a 10 per cent drop from peak to trough – remains on the cards amid a sea of financial, economic, commodity price, geopolitical and interest rate turmoil, analysts say.

But the message to investors from economists and advisers is to stick with your long-term plan, because trying to time falling markets can end in tears.

AMP chief economist and head of investment strategy Shane Oliver said the chance of a 10 per cent-plus fall from peak to trough was high.

AMP chief economist Shane Oliver says larger falls are likely. Picture: supplied

He said the US market had also dropped about 8 per cent this year, and it was at higher risk of a sharp fall because of its focus on tech stocks that traded on high valuation multiples, “but it sets the direction for everybody else”.

Dr Oliver said recession fears had faded but still remained, and stocks had been hit by higher bond yields “that puts pressure on share market valuations”.

“Its quite likely we will get beyond that 10 per cent in terms of a fall … later this year it might start to improve: seasonally markets strengthen into Christmas.”

Investors who switch out of shares and into cash can come unstuck because of timing and confidence issues, while others see corrections as buying opportunities.

Dr Oliver said most investors were better off sticking with their existing plan, which could include regular contributions.

“People tend to sell after a fall, and generally it’s hard to get back in,” he said.

“These things can be very fast-moving. It’s normal for the market to experience this sort of volatility – 10 per cent falls are regular occurrences, and it’s the price you pay for that higher return from shares.”

Wealth for Life Financial Planning principal Rex Whitford said having an investment strategy was a big help.

He said long-term investors often looked forward to downturns because “you are buying everything cheap”.

“Don’t go to cash – this trying to time the market is insane,” Mr Whitford said.

Defending your portfolio from a downturn should not mean selling up, experts say.

“The market will recover, unless there’s an Earth-crossing asteroid,” he said.

“If you have money you don’t need for a while and are prepared to ride it out, go ahead and buy – the market is on sale.”

Mr Whitford said many investors were better off using broadbased index funds rather than picking individual stocks.

“People worry way too much about the capital value of their assets rather than the income-producing capacity of those assets,” he said.

Not every analyst is tipping more sharp falls for shares.

IG market analyst Tony Sycamore said in late September he had “turned tactically bullish on the ASX 200” and was looking for the index to climb from current levels near 6950 to possibly year-to-date highs above 7560.

“After waiting patiently for months, we view the 8 per cent pullback from the July highs into range lows as an opportunity to position for a rebound into year-end,” he said.