What to do?
How can you cope with volatile investments? One way is to avoid them, sticking with low-risk funds or bank term deposits. But in the long run your money will grow much more slowly.
If you plan to stick with shares, higher-risk KiwiSaver funds or other share funds, ask yourself three questions:
Is your investment spread across many different shares?
If you’re in a KiwiSaver fund or another fund, this is taken care of for you. All the funds I know of invest in a wide range of shares.
If you’re investing directly in shares, it’s wise to spread your money over at least ten companies, and 20 or 30 is better still. Shares in a single company can become worthless, but that doesn’t happen to multiple companies all at once. What’s more, the companies should be in a broad range of industries. A single industry can hit hard times.
It’s also wise to invest in many different countries. The easy way to do this is through a New Zealand-run managed fund that holds international shares. Many KiwiSaver funds invest internationally. Ask your provider about your fund’s mix.
When do you plan to spend the money – perhaps on a first home, or in retirement?
You don’t want to ever be forced to sell an investment when it’s down. So you need to think about your spending plans.
If you expect to spend the money within ten years, I suggest you move to a medium-risk KiwiSaver or other managed fund. If you stay at the higher risk level, there’s a chance the markets will fall and won’t recover in time.
Then, when you get to within two or three years of spending, move to a low-risk fund or bank term deposits. Even medium-risk investments can be pretty volatile. You want to be sure that every last cent will be there when it’s time to withdraw the money.
How would you feel if your investment balance halved in a downturn?
It’s happened before. Starting on BlackTuesday, 20 October 1987, the value of all the shares listed on the New Zealand stock market halved in less than four months. The market continued on down to a 60% drop, and took several years to recover. Around the world, the crash was similar, although the recovery was faster.
When the market crashes, many people sell their shares or move their savings to lower-risk investments. This is a bad move. If your $10,000 balance becomes $5,000 and you sell or switch, you’ve made that $5.000 loss real. But if you wait – and your investment is well diversified - your balance will grow back again.
How do I know? Share markets have always recovered in the past. And when you think about it, they always will. Companies continue to provide goods and services, and people continue to buy them. Many of those companies will make profits, and investors will want to participate by buying shares in the companies. That demand will push prices back up.
Put it this way: if that process doesn’t continue, we’ve got more to worry about than our investments!
Despite these assurances, though, some people can’t cope with seeing their balance fall. If that would be you, it’s really important that you reduce your risk now, before a downturn, so you don’t find yourself turning a loss on paper into a real loss.
I’m worried. While it’s great to see many new people getting into investing in shares, and others taking more interest in their KiwiSaver accounts as their balances grow, they could be riding for a fall.