Who doesn’t love a sale? When you spot something you need in the supermarket at half price, you probably stock up. So why do some investors tend to hang back when prices fall?
When you’re an investor, particularly if you haven’t been in the market for a long time, periods of volatility can come as a bit of a surprise. But a key part of investing success is knowing what to do when the value of your investments is moving around – and how to benefit from the resulting “sale”.
Here are five things to keep in mind.
Volatility is normal
The first thing all investors need to know is that volatility is just part of investing, and totally normal.
History shows that every few years, investors have experienced a downturn of some kind. Sometimes they have been big downturns that have lasted a while, while other times have just been periods of bumpiness that blew over quickly.
As an investor, expect volatility and don’t be alarmed when it happens. It’s the falls in value that give you the opportunity to make gains over the long term.
It can be caused by many different factors
Sometimes volatility is caused by factors in the local economy, and sometimes it’s due to global forces that affect investments around the world.
It can be driven by things that could have been predicted, while other times it comes as a surprise – as with Covid. A big driver is investor sentiment: if people start to feel less confident in investment assets for a while, it softens demand for them and this affects their value.
Grab the opportunities
Some of the best investment opportunities come when times are tough and other investors are feeling wary.
Although it may feel counterintuitive if others aren’t buying, the best time to snap up some investments is often during a downturn.
Think of it like that supermarket sale: if you were going to buy something anyway, it makes sense to stock up when you see it at a great price. During a downturn, you’re likely to see more investment assets “on sale”. If you see investments that have great fundamentals, at a good price, it can set you up to do well when the recovery comes. When you understand what’s driven the fall, it can help you identify the investments that have ended up particularly undervalued.
You may need to be prepared for further falls, so it’s important to stick to investments that fit with your overall strategy. It’s really hard to pick the bottom of the market, and there may still be more volatility ahead. But if you’re happy that what you are buying is a good investment, you can ride this out.
Volatility can power KiwiSaver, too
Volatility is also a superpower for your KiwiSaver. Because it’s usually a long-term investment, you can afford to have your money invested in assets that move around in value a lot. Your fund manager will buy more assets with your contributions during periods of weakness, which means your fund bounces back faster when prices pick up again.
Stick with it
The most important thing to do is to keep a calm mind. No one likes to see the value of their investments fall, but if you move your money to a safer asset, you turn what was an on-paper loss into a real drop in wealth.
Provided you have a good strategy in place and know your investment is a good match for your risk profile, the best thing to do is ride it out. It’s only if you know that you will need the money within the next few months to a year that you need to take action.
Like to talk?
If you’re thinking about the volatility you’re seeing in your portfolio, or would like to talk about what you would do if you did encounter some, give us a call. We can help you navigate investment cycles and stay 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.