Large government and household debts, higher-for-longer interest rates, and rising geopolitical uncertainty are growing concerns for investment markets.
Lofty valuations during the COVID era may have made sense in an environment with low inflation, low interest rates, and high corporate earnings. But now, the world has changed.
Across the globe, while inflation has fallen from its peaks, it remains stubbornly above targets. Following aggressive rate hikes, central banks are now taking a more measured approach, with many preferring to pause the hiking cycle and wait to see the impact of higher rates flow through the economy. The market has realised that while central banks may not be increasing rates, they are unlikely to cut them anytime soon. This heightens the risk of a recession.
Longer term, global asset manager GMO sees inflationary pressures as likely being higher than they have been for the last two decades. It sees declining populations and climate change as key inflationary and growth hurdles. Their analysts comment that no country in the developed world has a replacement birth rate, and China, the engine of global growth for decades, is aging rapidly. The costs of adapting to climate change are expected to slow growth, while an increase in extreme weather events is likely to impact food and energy prices.
Reading this might be making your head spin, but it's important to keep in mind that markets and economies have navigated great change before. The vast majority of people keep their jobs in recessions and survive wars and pandemics. But even in the splendid isolation of fortress New Zealand, international events can and do impact us financially.
So, how should you invest when the world has changed?
A sensible goal is to act like an investor, not a speculator. Investors take a systematic approach to growing their wealth, buying assets with reasonable risk in exchange for long-term growth. Speculators, on the other hand, buy assets that may experience rapid growth but can also lose significant value if they fall out of favour.
Four ways you can act like an investor.
Take a long-term view and understand time is your ally. Time enables investment returns to compound and exponentially grow your wealth. The difference between saving $20,000 in an aggressive fund at age 25 instead of 35 could be up to $35,000 extra at retirement*. Time also helps you offset volatility, to ride the ups and downs and potentially achieve higher returns overall. It’s true there have been some frightful years in investment market history, but these aren’t the norm. Over the last century or so, the S&P 500 Index has posted positive annual gains roughly 75% of the time.
Understand your investment timeframe to take more calculated risk. If you’re 40 years old and saving for retirement, consider a growth or aggressive fund. This type of investment is more volatile in the short term than lower risk funds, such as conservative or moderate, but is expected to generate higher returns over the long term. On the other hand, if you’re saving for an overseas trip in the next year or so, a term deposit or cash fund may be a good option.
Recognise your risk appetite. The last thing you want is to be constantly worrying about your investments, even if intellectually you know you have made a sound investment decision. In these situations, it can make sense to talk with a MAS Adviser or make the decision to trade some potential upside for some actual sleep.
Diversify your investments. If you’re like most Kiwis, your wealth is mainly tied up in your family home or bank deposits. This represents a very concentrated portfolio. The world is changing, and the future is open, so it can be a good idea to spread your investments. Some investments may not produce the returns you expect while others may succeed beyond your expectations. Diversification helps you balance out the bad with the good to help protect and grow your capital.
Putting it all together
These principles can be combined to create a long-term investment plan. In fact, if you have a KiwiSaver account, you may be already doing this; contributing regularly into a diversified fund that’s aligned to your risk appetite and investment timeframe.
The final step is to keep up your regular contributions, especially if markets fall. This will make your dollars go further as you’re buying more assets than you were previously when valuations were higher. It’s a bit like buying skinny dipped chocolate almonds on special. You’re still spending $10, but now you’re getting two packs instead of one. This investment rule is called ‘dollar cost averaging.’ It helps you offset short-term losses by acquiring long term assets at temporarily lower prices.
Responding to a changing world
When the world changes dramatically, we can feel compelled to react accordingly. While this might be appropriate in some instances, it isn’t necessarily true for your investments. Overcome your impulses by thinking like an investor. Focus on your investment timeframe, understand your risk appetite, and diversify your portfolio. Then ensure you’re contributing regularly to use market volatility as an opportunity to increase your holdings at lower prices.
This way, you can harness change and transform it into opportunity.
Head of Growth, Investments, MAS
We’re here to help
At times like these it's important to keep your long-term goals in mind. While fluctuations in your account balance can be unsettling, it's reassuring to know that you can speak face-to-face with your dedicated MAS Adviser at any time. They can work with you to develop a sound investment plan and help you stick with it over time. There is no additional cost to speak with a MAS Adviser, and because they are not paid commission, you can be sure they have your best interests at heart.
Call us on 0800 800 627 today.
This article is of a general nature and is not a substitute for professional and individually tailored advice. Medical Funds Management Limited, JB Were (NZ) Pty Ltd, and Bancorp Treasury Services Limited, their parent companies and associated entities do not guarantee the return of capital or the performance of investment funds. Returns indicated may bear no relation to future performance. The value of investments will fluctuate as the values of underlying assets rise or fall.
MAS only provides advice on products offered by its subsidiary companies. Advice is provided by MAS or by its nominated representatives (who are all MAS employees).
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Medical Funds Management Limited is the issuer and manager of both Schemes.
*These calculations were made using the MAS KiwiSaver Calculator using 2 different scenarios: 1) The member invests $20,000 at age 25 with expected balance calculated at age 65. During their 40-year investment timeframe, the member earns no income, makes no contributions, withdrawals, transfers, or fund switches; 2) The member invests $20,000 at age 35 with expected balance calculated at age 65. During their 30-year investment timeframe, the member earns no income, make no contributions, withdrawals, transfers, or fund switches.