Avoiding investment behavioural traps.
At BNZ we often talk about market volatility and how it affects your investment returns, which might sound like a broken record, but the truth is, volatility is part and parcel of investing. Rather than worry about market volatility and down-turns, be prepared for them. Here are four tips to help you ride out those market fluctuations.
1. Be comfortable with your investment fund choice
If you feel uneasy when financial markets go through downturns, you may not be in the right investment fund that reflects the level of risk you’re confident with. When choosing a fund, you should consider your goals, how long you have until you need to access your investment savings, and your tolerance to stomach the short-term ups and downs of financial markets.
Growth funds experience more volatility because of their greater exposure to ‘higher risk’ assets (such as shares), but have the ability to generate higher returns in the long-term. Generally, growth funds are considered the best place for younger people to invest their retirement savings, simply because they tend to have more time to recover from the impact of any short-term market setbacks on the value of their investments.
If you’re closer to retirement, or are using your savings to buy your first home, you might want to consider choosing a fund with more exposure to ‘lower risk’ income assets (such as cash and fixed interest).
2. Stay focussed on your long term goals
Once you’re comfortable with the amount of risk you’re taking it’s good to know that history shows us that financial markets tend to recover from short term downturns.
For example, the chart below shows the performance of the S&P500, the 500 largest US stocks, over the past 26 years. You’ll see that US financial markets went through a number of down-turns, followed by periods of recoveries. Despite these downturns, annual returns were positive for 18 of the 26 years we looked at.
Past performance is no guarantee of future results. Returns are based on index price appreciation and dividends. Not intended to represent the performance of any BNZ investments fund or strategy. For illustrative purposes only. Data from 28/02/1990 to 30/09/2016. Data source: Bloomberg.
If financial markets take a hit, it’s most likely not the end of the world as both locally and abroad, markets have a track record of recovering. If you have a longer investment timeframe, your investments should be able to recover from any short term downturns.
3. Contribute regularly
If you could avoid the bad days and invest only during the good ones you’d see great results, but unfortunately it’s impossible to predict when those good and bad days will happen. When markets drop, the value of any existing investments you have may fall. However, your regular contributions should allow you to snap up new investments at a lower price. This may also mean that as markets eventually stabilise and recover (as history has shown us), the investments you bought at the lower price will typically increase in value as well.
If you’re contributing regularly (for instance by contributing a proportion of your salary every month) market downturns should have little impact on your long-term returns.
4. Don’t panic
Market downturns happen. Sometimes they’re big. But they are a part of investing, so there’s no reason to panic. Instead of focusing on the turbulence, worrying and wondering whether you need to do something now or what the market will do tomorrow, take a few minutes to check you are in the investment fund that’s right for you. If you are still unsure, give us a call on 0800 269 5494 and ask to speak to one of our BNZ Authorised Financial Advisors.
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This blog is solely for information purposes (and is only for New Zealand residents]. None of the matters in this blog are personalised financial advice. We recommend that you seek financial advice specific to your personal situation and goals from an Authorised Financial Adviser. No representation or warranty is made as to the accuracy, reliability or completeness of any statement made in this blog. Neither BNZ nor any person involved in the preparation of this blog accepts any liability for any loss or damage arising out of the use of, or reliance on, all or any part of this blog. The information and recommendations are the personal views of the author and do not necessarily reflect the views of BNZ.
BNZ Authorised Financial Advisers’ Disclosure Statements are available on request and free of charge. Past performance is not an indication or guarantee of future performance.