Advice matters
Keeping emotions in check when markets are volatile

2022 has been a volatile time for the investment markets, and not just here in New Zealand.

High inflation, rising interest rates and geopolitical unrest are all contributing to an uncertain picture. And even though there are positive signs here and there, volatility looks here to stay a while longer.

So, here are some tips from our SHARE advisers, to reduce the impact of emotions on your investment decisions.

A recent example to learn from

Seeing your KiwiSaver balance or the value of your investment lose ground can be challenging, but as the Covid-related downturn of 2020 has shown, it’s important to avoid impulsive decisions.

Back in March-April 2020, many KiwiSaver members suddenly chose to switch to a lower-risk fund in an attempt to protect their savings. Little did they know that, by doing so, they would miss out on the recovery just a few weeks later. That’s because, by switching fund types, they had turned ‘paper losses’ into real losses (also known as ‘crystallising losses’).

This is just a practical example of the power that emotions can have over people’s decision-making. Their personal goals, needs and circumstances hadn’t changed, but the downturn triggered their ‘fight or flight’ response, sending them off track.

So, how can you better manage your response? By keeping perspective.

Acknowledge your attitude to risk

All investment tools, including your KiwiSaver plan, entail some level of risk. Markets are cyclical, and they fluctuate in value all the time. That’s why it’s important to understand your own risk profile.

There are essentially three components to it: your time horizon, your emotional response to volatility and your investment/savings goals. Let’s start with volatility: how do you feel about the prospect of seeing your investments drop from time to time, in exchange for (likely) higher long-term returns? Make sure you acknowledge the emotional side of things, rather than just ignore it. Then you can minimise the impact, by focusing on your time horizon.

Understand your investment horizon

Are you close to retirement, or is it still more than ten years away? Your investment horizon is one of the pillars of your investment strategy. It determines your capacity for risk, which is how much volatility your investments can withstand, based on (1) your goals, and (2) when you’ll need the money by.

In short, the longer your investment horizon, the more risk you may be able to take with your investments. For example, if you’re using KiwiSaver, a growth or aggressive fund may be worth considering.

Not quite sure where to start? Get in touch: our SHARE advisers are here to answer any questions you may have.

Review your strategy

It’s a good idea to review your investment strategy at least once a year, to ensure that you’re still comfortable with it.

If your goals or circumstances have changed, it might be worth adjusting your portfolio accordingly. For example, you may look at diversifying your investment strategy to minimise risk and maximise growth. Or, if your income has increased, you may consider increasing your investment contributions.

Once again, we’re here to help: we can run your numbers and talk you through your options.

Stick to your plan

If your circumstances or goals haven’t changed, then there’s no need to do much. In fact, staying the course may be your best strategy.

Markets will always go up and own – it’s their nature. But if you accept volatility, focus on the long term and stick to your plan, you can reduce the impact of emotions on your investment decisions. And rather than trying to time the market (which is simply not possible), make sure you focus on time in the market. Historical data shows that investors with diversified portfolio who remain invested are more likely to experience steady gains over time.

Do you have any questions for us?

Get in touch. Our SHARE advisers can help you take a closer look at where you’re at, and put together a strategy to get you where you’d like to be.

Like to talk about it? Click here to find a SHARE adviser near you.

Disclaimer: Please note that the content provided in this article is intended as an overview and as general information only. While care is taken to ensure accuracy and reliability, the information provided is subject to continuous change and may not reflect current developments or address your situation. Before making any decisions based on the information provided in this article, please use your discretion and seek independent guidance.