When investment markets start bouncing around, and especially when they fall, investors can often have a sense of unease or even mild panic. When this happens, it is important to maintain some discipline and ensure you stick to your investment plan.
No-one likes to see their investments lose value when the market has had a large and unexpected fall, but the falls (and the rises) are a normal part of investing. Often, you’ll hear these situations referred to as “volatility” – which is just a general word to describe how much and how often the market can rise and fall, nothing else. Investment markets that trend up and down more consistently over the long-term very rarely attract attention.
It’s a natural reaction to worry about your money whenever there’s a large movement in the markets, especially when it’s a larger than normal fall. That worry can make you react impulsively e.g. to want to sell down your shares; but that may not be the right thing to do in the long term.
One thing you can do is to make sure you’re well prepared with an investment strategy in place that is well structured to meet your goals and financial situation. Having a plan in place means that when the market does fall unexpectedly you are better equipped to cope with the normal ups and downs of the markets and feel less anxious as a result. This will also mean you’re well placed to take advantage of opportunities as they arise, but more about that later.
So, what can you do to make sure you’re prepared when investment markets do fall? Here are some simple guidelines to help:
1. Understands that market downturns are perfectly normal and usually only last a short time*
There’s no doubt at all market downturns can be upsetting, but history shows that markets have been able to recover from drops and return to providing positive long-term returns. The U.S. share market is a good example to look at in order to demonstrate this.
Over the past 90 years the market has experienced a number of ups and downs, but what’s most interesting is that the average “Bull Market” (i.e. a period of rising values) lasted 9 years with an average return for the full 9-year period of 470%, compared to the average “Bear Market” (i.e. a period of falling values), which lasted just 1.4 years with an average loss of -41% for the 1.4 year period.
*Based on U.S. share market as it has the longest statistical history
2. Make sure you are comfortable with your investments
If you do tend to get concerned or anxious when markets drop, it would be a good idea to check that you’re in the right type of investments. Think about your investment time-frame, when you will need your money, how much risk you’re prepared to take on to get to where you want to be etc. If you’re not sure about this, make sure you talk to an adviser who can assist you through this process.
When an adviser helps you put an investment plan together, it’s always based on your needs, whether they’re short or long term. Generally longer-term investment strategies mean that your portfolio may have a higher proportion of “growth” investments i.e. shares and property. Shares, in particular, can deliver much higher returns over the long term but the ups and downs of the market along the way can test your nerves. If you are finding that it’s too much to handle then have a think about your investment mix to make sure it’s right for you, e.g. would you be more comfortable if you were to reduce the amount you have invested in shares and instead invest this in things that are less prone to ups and downs? The aim is to make sure you’re comfortable that your investments are appropriate to meet your goals whilst being able to handle the short-term ups and downs along the way.
Understanding how your money is invested can help to calm the nerves. Generally, advisers will recommend that you invest your money across a range of investment types and the amount you invest in each type will be determined by your investment goals, time-frame, and your attitude to risk etc. If you’re not sure, ask an adviser to explain it to you.
3. Don’t try to time the market
When uneasy investors see markets drop often they try to prevent losing more money by selling down their investments as quickly as possible; but this impulsive reaction can in fact do more harm to your potential return.
4. Make regular investments
If you maintain a regular investment plan over a sustained period of time, short-term drops in the markets won’t have as much impact on your overall investments. So instead of worrying about when to buy and/or sell based on market conditions, keeping to a regular savings/investment strategy will help to smooth the journey.
One technique that can be used to achieve this is known as dollar cost averaging. This is a strategy where someone invests a fixed amount into an investment regularly (say fortnightly or monthly etc.) regardless of whether markets are moving up or down. So, for example, if you’re buying shares when prices are rising then you will purchase fewer shares than if you were buying shares when the price is lower.
KiwiSaver is a great example of an investment plan where dollar cost averaging is automatically done either through salary deductions or by making regular voluntary contributions.
5. Get expert advice
To help you manage your investment portfolio through challenging times, engaging the services of an adviser (if you haven’t already) is well worth considering as they can assist you with:
a) Evaluating your investment goals to ensure your investments are appropriate for your stage of life, aiming for a smoother journey and reducing any day to day concerns you have to keep you on track towards achieving your goals;
b) Ensuring that you understand and are comfortable with the level of risk you are taking with your investments and that this level of risk appropriate to your circumstances;
c) Undertaking regular reviews and making any necessary changes to ensure you remain on track to meet your goals.
6. The bottom line
Rather than worrying about what the markets are doing and whether you should be doing something now or what the market might do in the future, it makes more sense to work on developing a sound investment plan. A well- structured plan will help you ride out the ups and downs and help to keep you on track to achieve the financial goals you’re after.
Peter’s disclosure statement that is available on request and is free of charge. The information in this article is of a general nature only and is no substitute for personalised advice. To the extent that any of the above content constitutes financial advice, it is class advice only. If you would like advice that takes into account your particular financial situation or goals, please contact Peter. The information has been published in good faith and has been obtained from sources believed to be reliable and accurate at the time of publication. Some of this information was sourced from a recent AMP article.