Understanding the downturn

08 May 2024

Navigating today's challenging markets

Global Markets are down, which means that your KiwiSaver balance has more than likely been on the decline these last few weeks. But that doesn’t mean it’s all bad news, learn how continuing to contribute through market fluctuations can boost your long-term strategy. 

Key Takeaways 

- Markets always go up and down, it is a simple fact of markets. Key to being a successful investor is not to react to the short-term movements of the markets, markets should recover.

- If you’re in the right fund type for your risk tolerance and investment horizon the short-term volatility should not materially impact you

- If you try to time the markets, you’ll probably lose out. Don’t panic and switch to try to mitigate the damage.

- On the plus side your KiwiSaver contributions are currently buying shares and other assets at a “discount”.

Wait. Pause. Breathe.

We get it, declining markets can be nerve-wracking. For many, the impulse to do something about it – like switching funds or KiwiSaver schemes – is intense. However, the key to being a good investor is to sit tight, and not make rash changes to your long-term strategy based on short-term data. 

Watching your KiwiSaver balance decline is never easy, especially when you’ve worked so hard to grow it. But here’s the thing: this is part and parcel of investing. Markets always move up and down, though over the longer term they typically go up.  Remember, you are a long-term investor with your KiwiSaver plan, so you should be focused on the long-term outcomes.

What have markets done in the past? 

As you can see from the chart below, $100 invested in the MSCI AC World in 1987 was worth almost $1,0001 as of May 6th, 2024, but that was not always the case. There were several large short-term dips along the way, but the global market has always recovered over the long-term.

1 Source: Factset. Based on total return of the MSCI World Index from 31 December 1987 through to 6 May 2024

Looking at a number of global downturns over the past 30 years, on average markets fall 38% from their peaks and it typically takes 26 months for markets to recover. Alternatively, the 2020 Covid ‘dip’ was short-lived: markets only took two months to bottom out and five months to recover. For a more detailed read with data on the history of market downturns and rebounds, check out our blog here.

Market downturns: The silver lining 

As you can see, market downturns don’t last. Better, yet these declines allow investors – like you with your KiwiSaver plan – to buy shares at a cheaper price and benefit from the rebound.

Take the current market performance for example: global markets are falling, with the S&P index down 4.1% over the month to the end of April and the NZ share market was down 1.2% in the last week of April. If your fund is following the market trends, your contribution dollars will be purchasing more now than they were two months ago. This means you’re basically buying any new assets at a discount as you’re getting more for your dollar; you’ll see the benefit of this when the markets rebound.

How should you manage a downturn? 

So, now you understand that this dip won’t last and you’re likely benefitting from increased purchasing power on the market, but what should you do?

1. Do not try to predict the markets 

No one has a crystal ball, and we don’t know when the markets will recover. However, we do know that markets tend to recover quickly once they start heading up. For example, markets recovered c.20% within a 2-week span after the covid crash. If you had tried to time the markets, you would have most likely missed out on that bounce back.

2. Check your KiwiSaver portfolio: Does it match your objective and risk tolerance? 

Regardless of market conditions, is your KiwiSaver plan right for you? Your asset allocation should match your risk profile and investment timeline. If you’re investing for the short term or have a low tolerance for risk, you should have more in assets like bonds or cash funds. If you’re invested for the longer term or happy to see your KiwiSaver go up and down a bit, you should have more of your portfolio in equities and other growth assets.

Generally, the longer your investment horizon, the more risk you can take because you have more time to ride through a downturn. Alternatively, if your investment horizon is shorter, market volatility makes it even more important to protect your balance.

3. Not in the right fund type? Take action 

The current market downturn makes it more important than ever to make sure that you’re in the right type of fund. If you want to purchase a house in the next few years, you need to protect yourself against the possibility of further market falls. On the other hand, if you’re invested for the long term, these can be one of the best times to switch to a growth or aggressive fund and take advantage of those assets on discount.

In summary: It'll be okay 

Volatility is part of investing, how it affects you will depend on where you are in your investment journey and how soon you need to access your KiwiSaver funds. While it’s uncomfortable, this latest poor market performance is likely an opportunity for greater returns in the future for kiwis with time on their side. The best thing you can do is breathe, review, and be clear about what’s right for 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.

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