When markets fluctuate or asset prices fall, the common advice is to “stay put” to avoid locking in your losses. But what does that mean, and how can you make informed decisions during market volatility? Let’s break it down.
What does ‘Locking in your losses’ mean?
Market downturns can reduce the value of your investments—whether it’s shares, your KiwiSaver investment, or your home. But unless you’re planning to sell, these losses are only on paper.
If you sell when the value has reduced, you turn a temporary decline into a permanent loss. You also miss the opportunity to benefit when the market recovers. That’s what’s meant by “locking in your losses.”
How does it happen?
One common scenario is when investors panic during a market dip and move their investments to “safer” options.
For example, selling a KiwiSaver growth fund at its lowest point means realising the loss – often selling the investment assets for less than what was originally paid or from a higher peak value. By switching to a conservative fund at that moment, the reduced amount is then reinvested into lower-risk assets that may not recover or grow as quickly. This can leave you worse off in the long run, as you miss out on potential market rebounds.
How to avoid locking in losses
The key is having investments that align with your risk profile from the start. Choose funds or assets that suit:
- Your investment horizon: How long until you need the money.
- Your risk tolerance: Your comfort with market ups and downs.
When your investments match your goals and risk appetite, it’s easier to stay the course during volatility.
Remember: Market movements are normal
Market cycles are part of the investment journey. Value will rise and fall, but over time, assets such as shares and property generally appreciate. Staying invested during downturns helps you ride out the lows and benefit from the highs.
Diversification can help
Spreading your investments across asset classes, sectors and regions can reduce risk. While one area may dip, others may perform better, balancing your portfolio. Diversification is generally a smart way to manage market fluctuations.
Is switching ever the right move?
The advice to avoid locking in losses doesn’t mean never making changes. Repositioning investments can make sense, especially if you’re moving between similar options, like one KiwiSaver growth fund to another.
Before making changes, it’s important to understand the implications. We’re here to help you evaluate your options and make informed decisions.
Let’s talk
If you have questions about your investments or want to discuss performance, reach out. We’re here to guide you through market changes and keep your financial plans on track.
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.