Why it might be time to stock up when your investments go down in value
If you read my last article in M2’s January edition, I mentioned that diversified funds should be on your investment supermarket list.
I thought it might be appropriate to stick with the supermarket theme for my next column, so this article is all about the beans.
When I ran the idea past my partner, she thought it wouldn’t work, suggesting that men don’t actually spend a lot of time in supermarkets. Naturally, I was shocked and horrified by her stereotypical view. Admittedly, I’d rather have a tooth pulled than visit a supermarket, but the arrival of online shopping has turned me into a virtual trolley guru. Besides, we all need to eat and most of us love a good deal.
The most important determining factor for markets, whether they are selling groceries or shares, is the price of stock. But for some reason, the way many of us react to a drop in price depends on which market we are shopping in.
Before I spill the beans, it might be useful to have some context to what has happened in 2018 regarding the share markets, and how they may have impacted your investments.
Up until the end of September, things were looking pretty good; nothing too flashy but returns were still in the green. However, since then it’s all been quite murky, with headlines about trade wars between the US and China, the US government shutting down a number of their services, good old Brexit looking like a car crash about to happen in slow motion, and the Federal Reserve raising interest rates. These have all added to the uncertainties causing prices to fall (note I do not use the words crash, plummet, tumble or blood bath) in the last quarter of 2018.
The MSCI World Index fell 7.1% for the year as did the S&P 500 by 4.4%. If you were investing in German markets, they fell by more than 18%. But little old New Zealand bucked that trend and, for the year-end to Dec 2018, the NZX 50 returned 4.9%. That last point may have passed you by, given all the negative noise going on in the media.
Overall though, not a lot of fun. For those of you who are in KiwiSaver or managed funds with a good allocation to growth assets like shares and a reasonably sized balance, you will have noticed your returns in most cases were negative and your balance has gone down! Worse, in many cases, you will have been putting money in as well and yet the balance is still negative! You were told at the time of investing you were in a growth fund, but now it sounds like a really bad Tui ad and it may well feel like it’s time to cut your losses.
This is where I want you to put down the tool belt, grab a cold one from the fridge, plonk yourself in your favourite chair and bear with me around my supermarket analogy. I know it sounds weird but it’s not a bad way to look at things and it might just give you a better perspective on what you are invested in.
Many investors’ natural instinct when they see their investment value go down is to get out before they lose any more of their savings. This happens time and time again and what they are actually doing is realising their loss. In most cases, the natural place they turn to is the bank, popping their money in an account which feels a lot safer, but doesn’t earn much for them. At least there the return is positive, right? Trouble is it can take some time to get the original balance back to where it was before the market correction took place.
So this is where the supermarket analogy kicks in. What happens when you go to the supermarket for your weekly or fortnightly stock-up of essentials and see your favourite can of baked beans on special? You know they are normally $3.00 but this week they are only $1.50! Most likely you will stock up and buy a few more, right?
They are the same baked beans as always: the quality is the same, the contents are the same, and the company who makes them is still the same; the only thing that has changed is the price.
The same goes for the share market. When the price of the share market goes down the companies are the same, their products or services are the same, and they are still managed by the same people, the only thing that has changed is the price. Knowing all that, what would seem the natural thing to do? Probably stock up and buy a little more because they’re actually at a discount too.
That said, it is not an easy thing to do when you see your investment going down. This is where you need to take a breath, make sure you are invested in the right products that are suitable to your own personal circumstances, fit for purpose, and more importantly remember why you are invested in them in the first place, which most likely will be for when you retire. If unsure, contact your provider or get some qualified professional advice from an authorised financial adviser to make sure you are on the right track.
So hopefully you might remember this little ditty next time you are surfing the supermarket aisles and stocking up on your staples, because I doubt you would buy more when the price is high.
Mint Asset Management Limited is the issuer of the Mint Asset Management Funds. Download a copy of the product disclosure statement here: www.mintasset.co.nz