By its very nature, investing involves risk. When you invest any amount, whether it's into a property, KiwiSaver, shares, or a managed fund, you accept the risks associated with that particular investment. The nature of all investments is that there are constant changes in value. However, with nearly all investment markets, values are expected to rise over long periods of time more than they're expected to fall, and this increase in value is the very reason why people invest.
Recently, investment markets have experienced a fall in values, mainly due to the war in Europe and the impacts of increasing interest rates. So, if you're checking a KiwiSaver account balance or another investment value you might notice a drop in value.
Here’s what you can do about it:
Frequently, when markets drop, investors might lose their nerve and try to offload their investments by selling them (or, in the case of managed investments such as KiwiSaver Schemes, change their fund choice, perhaps from a KiwiSaver Growth Fund to a Conservative Fund). This response is because studies have shown that a drop in prices hurts psychologically twice as much as an equal gain in prices improves your sentiment.
But, if we understand the way markets work in cycles, then investing more at lower prices can pay off handsomely. In this way, the fear of others can work in your favour. This means that when the markets drop, and prices are low it can be the perfect time to invest more – if you’re able to do so.
We’ve separately noted the world’s wealthiest people are making the most of the drop in asset prices to invest more than ever.
To put it simply, in the words of the famous investor and billionaire Warren Buffet,
be: "…fearful when others are greedy, and greedy when others are fearful.”
Depending on your stage of life, this could apply in a range of different areas, for example:
• A first home buyer might be able to now seize the opportunity to invest
• An existing homeowner with plenty of equity built up in their home might take the opportunity to leverage off their existing home to buy a bach or investment property
• Someone with an existing sum of cash on hand might be able to invest it all into a managed fund or other portfolio
Understanding investments and the way the markets operate will give you a higher level of investor confidence and the ability to tackle market drops with ease. Famous American entrepreneur, author, and speaker Jim Rohn deemed that a lack of knowledge about investing and risk was called “the language of the poor”. Essentially, the more educated you are about investments, the better you'll be able to stay in control when the markets drop, and the better off you’ll be overall.
Rohn even took this one step further to rightly point out that all risks relative, and that the bill you'll end up paying for not investing is riskier than investing in the first place.
This is paramount when dealing with a drop in values. No one likes seeing any investment value fall but staying calm and level-headed means you won’t be scared into any snap decisions that may adversely impact your long-term investment strategy and goals.
As you’ve hopefully learned from step number two (above), it pays to remind yourself that investment markets are in a constant state of fluctuation. These fluctuations occur as assets (such as shares/stocks, bonds, property, and so on) are all continually re-priced based on the latest information available. Sometimes these price differences are minimal, other times they’re huge – but that’s a part of what investing is. It’s riding out those price variations in return for long-term gain.
Part of staying calm is also not reading too much into scaremongering media reports and resisting the urge to check your investment values too often!
One of the characteristics of lockdowns over recent years was everyday investors with plenty of time on their hands ploughing headlong into share trading applications (apps) and buying up meme stocks. In the most recent downturn, perhaps it is unsurprising that the meme stocks have been the most punished, the values of most of these stocks is now a mere fraction of what it was just six months ago. Who knows where meme stocks may be in years to come, but amateur investing of this nature was and is seen as a widespread issue both in NZ and internationally, the largest market regulator worldwide, the U.S. Securities and Exchange Commission, recently commenced a public service campaign encouraging investors to do research before making investment decisions!
Hopefully, when you invested you researched thoroughly, and only invested in accordance with an investment strategy that aligns with your long-term aims.
One additional thing to be made aware of is that most investments are made with an investment timeframe of many, many years in mind. So, fluctuations in value today mean little. Even if you:
• Purchased a home recently that has fallen in value, unless you sell it immediately any loss is ‘un-realised’, which is to say it’s not real.
• Are retired and are drawing down your investment nest egg, perhaps from a diversified portfolio of assets, then it’s likely at least some of your investment will have to last numerous more years to keep providing you that retirement income.
Are you invested mainly in growth assets (such as shares and property), defensive assets (such as cash and fixed interest), or in a balanced mix of both? The mixture which suits you is called your investor profile.
Double-checking your investor profile every year or so, and every time you have a life event (such as the birth of a child or a change in living situation), is a wise thing to do. Your investment timeframe - how many years you want to invest for - is one thing that drives your investor profile, but so do many other factors including the level of investment risk you wish to take, your knowledge of investments, and your capacity to take risks.
Diversification spreads risk. We know that putting all your eggs in one basket is risky, which is why the first rule of investing is to diversify. Diversification is the easiest way to minimise the impact of a fall in the value of one type (asset class) of investments.
Done well, diversification can help you roll with the punches that life is sure to throw your way.
To recap, here are the things you can do when investment markets drop:
1. Invest more
2. Learn to earn
3. Stay calm
4. Stay goal-orientated
5. Check your investments match your investor profile
6. Stay diversified
It would be the pleasure of one of our highly trained professionals, to assist you with anything above
If you'd like to learn more, simply get in touch.