Get ready now for a market crash
Markets might be less scary if you see yourself as an investor when you’re shopping, writes Susan Edmunds.
Many New Zealand investors are illprepared for a market downturn, and some commentators are worried there could be widespread panic when a correction comes.
Share markets in New Zealand and around the world have had a strong run since the global financial crisis.
In the 10 years to the end of last year, the NZX had a gross return of 107.8 per cent. The S&P500 in the US was up more than 20 per cent last year alone.
But as the good results continued to roll in, predictions of impending doom increased.
More commentators have pointed to the stretched share prices, warning that they cannot continue.
This month professor William White, the Swiss-based head of the OECD’s review board and ex-chief economist for the Bank for International Settlements, said the system was as stretched as it was at the peak of the last bubble, which ended with the global financial crisis (GFC).
Thanks to KiwiSaver, that’s a concern to more New Zealanders than it might have been 10 years ago.
Almost 2.5 million of us are in the scheme, giving exposure to the equity markets to many people who have never invested before.
Fund manager John Berry, of Pathfinder Asset Management, said the dire headlines should not be cause to panic. ‘‘There are always scary predictions.’’
He pointed to Jim Rogers, a commentator who has been predicting the next crash annually since 2011.
‘‘There will eventually be a market pullback and he will claim to be vindicated – but for seven years so far he has missed out on a huge rising market.’’
David Boyle, group manager of investor education at the Commission for Financial Capability, is worried that when a correction does happen, it will come as a rude shock to people who have never experienced a down market before.
‘‘When the market does correct, and it will at some stage, it will be the first time a lot of New Zealanders have seen their balance go down. For a lot of people their first inclination will be ‘who’s taken money out of my account?’ My biggest fear is people make decisions without all the facts.’’
He said that even though KiwiSaver had started during the GFC, most investors had very small balances at that time.
The contributions they made from their salary, topped up by their employer and the Government, offset any downturn in share prices.
Since then, funds had steadily returned high single-digit percentage returns, or even double-digits, each year.
Now, if markets falter, KiwiSaver balances could drop by significant amounts.
Boyle said investors should talk to their providers about the type of fund they were in and how that could be expected to react to different market conditions.
The fact of the fund’s value dropping would not be a problem to those who did not need the money immediately. Usually, the best option was to stick it out.
‘‘If they make a kneejerk reaction and decide to move funds to a more conservative option they’re essentially realising that loss. That is probably not the right outcome for any KiwiSaver investor.
‘‘If they stay there with a long time horizon they can learn to be a bit more confident about not just the highs but the lows. Those assets haven’t changed, they’re the same good assets the manager has always been invested in. They’ve just been given a bit of a discount.’’
Investors who switched funds from growth to conservative would find it much harder, or even impossible, to recover any value they lost.
ASB wealth economist Chris Tennent Brown said people should use the time when markets were strong to make sure they were in the right fund for their risk profile.
Once that was in place, any correction would be less of a concern, he said.
‘‘A whole lot of news headlines is a poor way to run your investing life. If you’ve risk-profiled yourself correctly, a whole lot of negative headlines are just business as usual.’’
For those who found they could not hold on in a downturn, Berry said an option was to move to more defensive stocks. ‘‘People always need to buy food and will keep using their phone.’’
Another option was to think about being more unhedged on offshore equity exposures. ‘‘If global equity markets fall the New Zealand dollar also tends to fall, which reduces at least some of the losses. If you are interested in responsible investing there is research showing that companies scoring highly on environmental, social and governance metrics are less volatile and have a much higher chance of avoiding bankruptcy.’’
Boyle said it might be helpful to remember the baked beans theory: You go to the supermarket and buy the same can of baked beans week after week. One week the can might be cheaper. At the supermarket, a shopper’s instinct is to buy more and make the most of that lower price. ‘‘But the psychology of investing is to get rid of it now because we don’t want to lose any more money.’’
Think of your KiwiSaver as a giant stock of cheaper baked beans and you might be willing to start contributing a little more during the downturn.
Tennent-Brown said the same criticisms being made of the market now were voiced a year ago.
‘‘If you had chosen to pull out then, you would have missed out on a good period of returns. And if you get out, what’s your signal to get back in? If you wait until things are safe and rosy again you miss out on the first part of the next growth phase.’’