Shares can be volatile don't panic

The Australian sharemarket is volatile

The Australian sharemarket fluctuates every day, because every day thousands of buyers and sellers of shares trade them.

Sometimes, specific events will cause the value of certain shares to rise or fall. You may remember some positive events that caused the sharemarket to rise (eg tech boom, resources boom).

You might also remember some negative events that caused it to fall (Asian financial crisis, 'Tech Wreck' and global financial crisis).

But overall, the value of the Australian sharemarket has risen substantially over time.

Historically, markets have always recovered

The Australian sharemarket began trading in 1875. It has delivered positive annual returns in 97 out of 135 years. This is 72% of the years. Of these positive returns, most were between 0% and 20% pa. There are, of course, years when the sharemarket has delivered extraordinary positives (over 40%) or negatives (under -40%). But it's important to remember that these results are rare. While the swings in the market might look extreme over one year, they are less pronounced over the long term. Traditionally sharemarkets have recovered from short-term setbacks with significantly higher gains.

In fact, the value of $50,000 invested at the end of 1995 is worth $176,888 at the end of 2010, 15 years later. This is an average return of 8.8% pa (assuming dividends are reinvested).

Growth of the Australian sharemarket
S&P/ASX 300 Industrial Accumulation Index

Source: Perpetual. As at 31 December 2010. No allowance has been made for taxation. Past performance is not indicative of future performance.

Volatility is not necessarily a bad thing

Shares seem more volatile than other types of growth investments like residential property, because share prices are regularly traded on a stock exchange and are therefore valued more frequently than property. Residential properties are valued much less often, generally when the owner is looking to sell. If they were auctioned daily their values could go down depending on daily demand which would vary rapidly.

It's also important to remember that volatility is not necessarily a bad thing. If there is volatility in the market, it means that there is liquidity. To achieve a high return it's generally necessary to accept some volatility or risk.