The world can seem like a chaotic place right now, with COVID pandemic still to deal with, wars ongoing, and all flavours of political upheaval. All this can make the idea of investing seem too complicated.
2019 saw news about Trump’s impeachment, Brexit, North Korea, and Hong Kong protests, yet the market went up 31%. Since then, COVID-19, Ukraine, inflation, rising interest rates, and supply chain issues have been dominant headlines, while the US market fluctuated between drops of 37% to rises of 27%.
Volatile markets aren’t a new phenomenon, but they do raise a lot of questions: Will the markets keep dropping? How do you pick safe investments? Will you lose money? Here are some things to look out for.
Think in the long term
Investing is not a short term decision, so you need to be ready to ride out any temporary volatility and reap the rewards of that patience.
Market cycles happen; when things go up you make money, and when they go down you need to wait, as they almost always recover over time. While there have been times when companies haven’t survived a cycle, there’s no indication we’re in a significant downturn, so keep that long-term focus.
Consider diversification
Always diversify your investments in order to spread out the risks involved. Remember that managed funds, like KiwiSaver, are all diversified. The greater the risk profile of your managed fund, the greater the volatility. Higher risk means greater potential returns, but also lengthens the term of those investments.
Avoid selling in drops
If the market drops and you decide to sell your investments, those losses are locked in forever. Selling investments in a downturn to move from a growth fund to a conservative fund, for example, means that when the market does recover, the conservative fund will have a much smaller increase for the same period. To avoid longer recoveries, you should stay strong and avoid selling in response to drops.
Compounding interest
Compounding interest doesn’t stop, even in a market drop. Getting interest on interest you’ve already earned over time can add up to significant gains in the long term.
It’s our job to help you
If market volatility is keeping you up at night, speaking to an AdviceFirst adviser can give you peace of mind. If you need to adjust your risk profile, are looking for more diversity in your funds, or just want some assurance, call our team on 0800 438 238 or email letstalk@advicefirst.co.nz.
