KiwiSavers and investors are bemoaning the fall in value of their investments. Over the last few months, investment returns for balanced and growth portfolios have been negative, causing many to rethink their feelings about risk and return. It’s all very well to be an aggressive, risk-taking investor when share markets are rising, but the true test of your risk aversion comes when the market takes a tumble. After such a long bull run without a correction since the 2008 Global Financial Crisis, we have forgotten that markets have cycles and it is quite normal to have years where returns are negative.
A market downturn is not only a normal, natural event, it is also an opportunity. Without market downturns there would be no upturns and no opportunity to make a return. When markets go up, investors make money, and the lower the price paid for investments, the higher the return will be. It’s the old adage; buy low and sell high. Inexperienced investors have a natural inclination to do the opposite – that is, they only buy after a period of sustained high returns and when markets fall they panic and sell. Experienced investors, who understand how cycles work, use the low points in cycles to invest more. They know that over the course of time, markets will rise again, taking the value of the investment units purchased to new heights and producing a healthy return.
The problem is, it’s not possible to pick the lowest point in a cycle until after it has passed the turning point. To get around this, a good strategy is to invest more funds on a regular basis – monthly or quarterly – through a market downturn. Investing a little at a time at various points reduces the risk of missing the bottom of the market.