During a share market correction or downturn, the media may report that a certain market has ‘lost’ billions of dollars. What happens to all that money and where does it go? Is it really lost?
The answer is that it’s purely a book figure – a ‘paper 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 $550,000. Next week a second agent estimates it would sell for $500,000. Have you lost $50,000? No, of course not, but you may still feel poorer. This is the difference between value (what someone may be prepared to pay) and the price at which a sale actually occurs.
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. 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.
With a carefully built portfolio based on sound foundations, you have a much better chance of weathering any financial storm. The foundations of a strong portfolio rely on four key investment principles… quality, value, diversity and time. These key principles will give you the best chance of success. Every market will suffer periodic downturns, which may make you feel like you’re riding a roller coaster, however, over time the upturn will always triumph.
Remember that investing in the share market is generally a long-term strategy. The secret is to follow your investment strategy, not the headlines.
If you’re interested in finding out more about which investment strategies may work for you give us a call or send us an email today.
This article is for information purposes only and does not provide advice in any form. It does not take into account any person’s objectives, financial situation or needs.
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