As we approach the one-year anniversary of Capitulation Monday, 23rd March 2020 when the government announced New Zealand would enter a level 4 lockdown resulting in markets “crashing” 7%, investors are becoming increasingly uneased by the markets declining start to this year.
Having drifted down over 10% since the 4th of January, the S&P/NZX 20 Index is now in a technical “correction”; defined as a fall of 10% or more from a previous high. The sell-off is driven by some having fears of accelerating inflation, which has a contagious effect spreading anxiety amongst investors, resulting in rising bond yields and declining share values.
For well diversified investors with a long-term view these market declines are nothing more than noise – the occasional bump in the road on their journey to financial freedom. Market corrections happen and we will continue to see them of varying causes and scales throughout our lifetime – it is inevitable.
Lessons from 2020
The results of last year should have re-enforced the importance of not letting fear take control. In 2020 markets were down nearly 40% at one point, however the S&P/NZX 20 Index finished the calendar year up 16.55%.
Despite the lessons of 2020, the power of fear and our tendencies to focus on recent events has meant these modest declines have sparked community forums to fill with queries over whether now is the time to sell in order to avoid further losses.
And as many Kiwis have had a week of lockdown, it’s important investors don’t fall into the habit of checking the performance of their KiwiSaver or investment account every waking hour.
It was this very behaviour that caused many to switch their KiwiSaver from growth to conservative funds during the COVID crash, locking in their losses and missing out on the market recovery.
What to do
Good investing starts with accepting what you can’t control and focusing on what you can control. The ups and downs of the markets fall into the first category. When markets are more volatile or in a decline, your sense of apprehension can be fuelled by dramatic sounding news headlines or speculative theories on social media. It’s natural to want to take control in response to this. However, the reality is, acting on those emotions can end up doing you more harm than good.
For those still anxious, here are our simple truths to help you ride through the volatility:
Don’t assume the outcome
Day to day markets are unpredictable. While you may expect a certain outcome based on some piece of news, it doesn’t mean the “markets” will respond accordingly. Don’t make decisions based on crystal ball assumptions.
For every seller there is a buyer
The market is not a physical thing, it is the combination of buyers and sellers just like an auction. Panic selling when markets are declining is like running away from a sale. Remember there also has to be someone on the other side that is buying. Often they are long-term investors who are unfazed by the short term market movements and bargain hunting shares.
Don’t try and time the market
As we saw in 2020, market recoveries can come just as quickly as the prior correction. Trying to time the market – predicting when it is going to crash and when it is going to rise – is not effective.
In fact, there is significant research demonstrating that those who attempt to this end up locking in their losses and missing the critical recovery days. As a result, they tend to perform worse than the set-and-forget investor who simply regularly contributed to their investment portfolio.
Diversification, diversification, diversification
It’s the backbone of all investment advice. Diversification helps smooth the bumps in the road on your investment journey. The key to successful diversification is ensuring you have a spread across a range of asset classes, sectors and countries. This can be achieved by investing in just a couple of well diversified funds.
Manage your emotions
The ups and downs of investing can be worrisome, with the natural emotions generated completely understandable. Successful investors are the ones who learn to step away from the headlines and the daily noise, removing their emotions from the equation.
By focusing on your long-term objectives, your successes to date, keeping disciplined and diversified, the ride will be far more bearable. How to achieve this? Try not to ply yourself with constant information, like valuations that are already old or the views of others. Our advice is to look at your portfolio less not more.
Accepting that market corrections do occur is an important step to becoming a successful investor. This is particularly true for those newer to investing. Panic selling when the share market is going down usually hurts your portfolio, instead of helping it.
Whether it is your KiwiSaver or Kernel account, our principle is simple: let your financial goals and needs drive your investing behaviour. Not a reaction to events in the markets or the speculation of others.