Market loss a reminder to check, adjust the mixture
Last weekend I was lucky enough to be the judge of the New Zealand Fiat 124 Aniversario, a national gathering of Italian sportscars held out at the Southwards Car Museum on the Ka¯ piti Coast.
More than 40 lithe Latin sportscars made the final lineup, probably the largest gathering of the iconic model outside its native Italy.
At a time when the rest of New Zealand was driving Ford Cortinas and Vauxhall Vivas, the Fiat 124 Sport was cutting-edge innovation.
With a double overhead cam engine, disc brakes and coil spring suspension, the 124 was the shape of things to come when it appeared in 1967.
These days Canterbury, Waikato and Wellington are the Fiat aficionado strongholds, with strong turnouts from all three regions. The colour palettes have aged well, with the favourites being the orange and mint varieties (nicknamed Jaffas and Snifters, respectively).
The elegant little sportscars are surprisingly affordable. When I asked why, organiser Lyn from Christchurch noted that while owning an ageing Italian coupe seems a good idea in theory, the practice proved a bit more challenging, so owners moved them on.
The concept of ‘‘good in theory, but not always so flash in practice’’ applies to a range of situations, from getting married to taking on investment risk.
Before entering investment markets, investors need to work out how much risk they are prepared to take on to achieve their investment goals.
To achieve higher long-term returns you need to be comfortable with a greater risk of losing capital in the short term. This is because the assets that deliver higher long-term returns (equities) are more volatile than assets producing lower returns (bonds and cash).
To work out a person’s position on the risk/return tradeoff, financial advisers use a risk-profiling tool that asks how comfortable they are with having months or years of losses on the road to longerterm investment goals.
But the funny thing is that people in front of a keyboard or an adviser, on a nice day with a nice cup of tea beside them, can be a bit brave about theoretical risk. The reality of that risk a year or two later, when they see the value of their retirement savings suddenly fall $20,000 in a month with the prospect of falling further, is quite different.
That’s exactly what happened last month when global markets shed 6.7 per cent, led by the United States markets where the S&P 500 lost almost 7 per cent.
For a lot of New Zealanders, this meant that when they got their October statements they found they had lost thousands of dollars.
For investors with less than 10 years in the markets, last month was their first real experience that what goes up can come down. Most likely it’s even worse than they suspect because of the way percentage math works.
Let’s say you suffer a 25 per cent loss in a year. To fully recover that it takes a 33 per cent gain in the next year, not just 25 per cent.
In an extreme case like the global financial crisis, the S&P 500 dropped 50 per cent in 17 months. To recover that loss took a 100 per cent gain. Something that those with backbone were able to benefit from and more besides.
But the overwhelming lesson from the October machinations is that all of us have been on the receiving end of an unprecedented bull market.
As of August 22 it officially became the longest bull market in history, running for 3453 days. But that’s not normal. According to Bloomberg figures, an average bull market lasts about half that.
To be clear, that doesn’t mean a bear market or major adjustment is just over the horizon. Neither does it mean investors should chop and change their market position, a recipe for disaster.
But what it does mean is that a lot of people have worked out their appetite for volatility when markets have been consistently heading north.
Now they’ve had a brief taste of a market heading south, it’s a good time to re-examine their tolerance for volatility. A 25-year-old has got more ability to soak up bumps than a 75-year-old.
Back in the 1990s, when I was still in short pants, one of the doyens of the local investment community, Frank Pearson, gave me some advice. He told me that my age should equate to the percentage of investments I had in income-producing assets such as bonds and cash.
So by the time I am 60 years old, 60 per cent of my investments should be in these asset classes and just 40 per cent in capital growth assets such as equities.
He also recommended I review my settings every year to ensure everything still works. A bit like a Fiat 124.
Mike ‘‘MOD’’ O’Donnell is a professional director and former Fiat owner. His Twitter handle is @modsta and this column does not constitute investment advice. While this is his personal opinion, he is a director of Kiwi Wealth.
Let’s say you suffer a 25 per cent loss in a year. To fully recover that it takes a 33 per cent gain in the next year, not just 25 per cent.