How easy was it to hold your bottle in the 2020 market sell off?
The sharemarket dive of 2020 tested my own limits. Not because of its size, but mainly due to the non-financial origin of the problem.
Everything I’ve lived through since the ‘87 crash had an identifiable financial force behind it. The early 90s recession, Japanese and Chinese asset price bubbles, the Russian crisis, the dot-com bubble, the GFC and the European sovereign debt crisis to name a few.
These were fairly rational compared to the impact of invisible virus particles being transferred around the human race. In no other recent crisis or war did the world’s wealthiest humans get repeatedly locked up, not go to work and only opened their wallet to eat. This stuff melts economists’ brains.
It is with zero judgment and absolute understanding that not everyone held their bottle.
So what did we learn from it all? Here are some of the things I personally find helpful.
The worse it is, the less you should do
In an event this major we face the risk of parts of the financial system collapsing. If this happened, money moving into cash and bonds is just as risky. If currencies collapse or inflation spirals, banks can lock up the ATMs and bond markets freeze.
The bigger the problem, the more likely worldwide government intervention is needed. Doing nothing and continuing to hold is a sensible course of action.
Your fund manager doesn’t have their feet up
As the dust settles they’re preparing for the aftershocks. If they can see sectors that are going to be more exposed they’ll sell things. If they see companies who will benefit in the chaos, they’ll buy.
Sometimes a dog is a dog
While I like the old adage “time in the market, not market timing”, it also has moments where it’s utter rubbish at a granular level. I can recall investing a technology fund around 1998.
After it doubled then fell to the floor, I decided to run an experiment to see how long it would take to return to the value I invested. Twelve years later I called it quits and got bored. Sometimes a dog is a dog and it barks for a decade.
Try to comprehend risk in numbers
Take a look back in history at a sharemarket index. Find a big drop in value. Project those losses on to your own savings pot. If you had $100,000 and it fell to $70,000, sit with that thought and imagine carrying on with life. Go to work, book a holiday and buy birthday presents with that loss sitting in the background. Make it real – is it the size of a Ford Fiesta or five Range Rovers? This is the can-we-hack-it conversation. Look forward on the chart and see how long it took to recover. These chats enable you to say “we expected times like this”.
Remember to rebalance when times are good
Portfolios get out of line thanks to gains in some areas being greater than others. If you have a balanced risk, your portfolio could be 60 per cent shares and 40 per cent bonds. If shares rise at a faster rate, years later you could end up 70/30 or 80/20 oblivious to the risk. In a market downturn the losses are likely to exceed your risk tolerance. Those under advice are having this service performed as a matter of course.
Own equity and bond funds separately
These are specialist areas and while KiwiSaver funds often chuck the two together, it lacks flexibility. For those running a portfolio of funds there’s the ability to withdraw from one asset class to maintain income and leave another to recover.
Diversification is your friend
The more funds you own and the more managers you invest with, the better. Make sure you have a spread in New Zealand as well as international equity and bond funds. You’ll never pick the manager with the softest losses in a crisis. An average is a reassuring place to be.
Retirement plans don’t need to go on hold
Many people who suffer pre-retirement losses believe they’ll have to keep working a few more years. Retirement is a long haul and withdrawals will be spread over decades. Taking income in downturns is allowed for in the models advisers use.
Acknowledge your own ‘recency bias’
Our actions tend to be controlled by the most recent events that have happened to us. There could be a fear of investing, a desire to stop your regular monthly savings into a fund or worry over further market shocks. Try to resist this type of bias, but acknowledge it’s normal to feel it.
Work with a financial adviser
In a crisis they will call. They calm you down, they let you rant and they generally run through points one to nine above. They have phone calls with fund managers, get market updates, rebalance your portfolio, keep you investing or will reassure it’s still OK to keep withdrawing an income, right through the midst of a global pandemic.
Janine Starks is the author of www.moneytips.nz and can be contacted at moneytips.nz@gmail.com. She is a financial commentator with expertise in banking, personal finance and funds management. Opinions are a personal view and general in nature. They are not a recommendation for any individual to buy or sell a financial product. Readers should always seek specific independent financial advice appropriate to their own circumstances.