Volatility investment 101: Keep calm and carry on

The refugee influx into Europe, conflict in the Middle East, China’s slowing economy, low oil prices and volatile global financial markets… it’s almost comforting to know that there’s nothing new under the sun.

In the 1950s it was Korea and the Cold War, the Vietnam War in the 60s, an oil crisis in the 70s, deregulation for New Zealand in the 1980s (and Black Monday globally), while the 90s offered the Gulf War and a number of banking crisis in countries like Sweden and Finland. In the 2000s we had the technology boom and bust, the GFC, and more wars… all in all; it’s the making of some pretty resilient investors.

The cost of higher share returns is volatility

Keith Poore, Head of Investment Strategy & Portfolio Management (NZ) for AMP Capital, says investors have seen a lot of serious market turbulence over the years and as a result we have become more mature and more sophisticated.

“We’ve learned that every age has its worries. The reality is that volatility is the cost of the higher returns that we get from equities. If you wanted flat equities, you would get the same flat returns you get from term deposits and bonds.

“Unquestionably, selling in times of volatility is the wrong thing to do. Markets often decline more than the fundamentals say they should because of knee jerk reactions to sell in order to crystallise losses. Unfortunately, it then takes a long time to make back those losses.”

Share market volatility not a reason to sell

Essentially market volatility is not a reason to sell, because it is actually the cost of the higher return you will get over medium to longer term horizon. More often than not, the reason to sell should stem from changes in your own personal circumstances.

“Markets will always be volatile, and a lot of it is noise. Base your investment decisions on an assessment of your own personal situation, and always take expert advice before acting,” says Keith.

Cashing up investments should be for personal reasons

Questions to consider include, for example:

  • Do you have a new job and how will that impact your financial position?
  • Have you been made redundant or seen a reduction in your income?
  • Do you find yourself with higher financial obligations to meet on a regular basis?

“These are the type of things that should determine if you sell or buy assets, rather than what the market is doing.

“A marketplace is by definition a meeting place of people with different views on assets. For every optimist there is a pessimist, or we wouldn’t have sellers and buyers – it’s a healthy function of markets,” says Keith.

NZ Dairy’s struggle not the whole story

On the local front, dairy may be struggling and it is a large part of the economy, but it is not the whole story.

“Our largest export earner is tourism, and that’s booming. We also have record immigration numbers. These are keeping the economy on a steady growth path.

“Pockets of distress, like dairy, are not enough to undermine the economy. We’re more resilient than that,” says Keith.

A disclosure statement is available on request and free of charge. The information in this article is of a general nature only and is no substitute for personalised advice. To the extent that any of the above content constitutes financial advice, it is class advice only. If you would like advice that takes into account your particular financial situation or goals, please contact your Financial Adviser.

Volatility investment 101: Keep calm and carry on

The refugee influx into Europe, conflict in the Middle East, China’s slowing economy, low oil prices and volatile global financial markets… it’s almost comforting to know that there’s nothing new under the sun.

The refugee influx into Europe, conflict in the Middle East, China’s slowing economy, low oil prices and volatile global financial markets… it’s almost comforting to know that there’s nothing new under the sun.

In the 1950s it was Korea and the Cold War, the Vietnam War in the 60s, an oil crisis in the 70s, deregulation for New Zealand in the 1980s (and Black Monday globally), while the 90s offered the Gulf War and a number of banking crisis in countries like Sweden and Finland. In the 2000s we had the technology boom and bust, the GFC, and more wars… all in all; it’s the making of some pretty resilient investors.

The cost of higher share returns is volatility

Keith Poore, Head of Investment Strategy & Portfolio Management (NZ) for AMP Capital, says investors have seen a lot of serious market turbulence over the years and as a result we have become more mature and more sophisticated.

“We’ve learned that every age has its worries. The reality is that volatility is the cost of the higher returns that we get from equities. If you wanted flat equities, you would get the same flat returns you get from term deposits and bonds.

“Unquestionably, selling in times of volatility is the wrong thing to do. Markets often decline more than the fundamentals say they should because of knee jerk reactions to sell in order to crystallise losses. Unfortunately, it then takes a long time to make back those losses.”

Share market volatility not a reason to sell

Essentially market volatility is not a reason to sell, because it is actually the cost of the higher return you will get over medium to longer term horizon. More often than not, the reason to sell should stem from changes in your own personal circumstances.

“Markets will always be volatile, and a lot of it is noise. Base your investment decisions on an assessment of your own personal situation, and always take expert advice before acting,” says Keith.

Cashing up investments should be for personal reasons

Questions to consider include, for example:

  • Do you have a new job and how will that impact your financial position?
  • Have you been made redundant or seen a reduction in your income?
  • Do you find yourself with higher financial obligations to meet on a regular basis?

“These are the type of things that should determine if you sell or buy assets, rather than what the market is doing.

“A marketplace is by definition a meeting place of people with different views on assets. For every optimist there is a pessimist, or we wouldn’t have sellers and buyers – it’s a healthy function of markets,” says Keith.

NZ Dairy’s struggle not the whole story

On the local front, dairy may be struggling and it is a large part of the economy, but it is not the whole story.

“Our largest export earner is tourism, and that’s booming. We also have record immigration numbers. These are keeping the economy on a steady growth path.

“Pockets of distress, like dairy, are not enough to undermine the economy. We’re more resilient than that,” says Keith.

A disclosure statement is available on request and free of charge. The information in this article is of a general nature only and is no substitute for personalised advice. To the extent that any of the above content constitutes financial advice, it is class advice only. If you would like advice that takes into account your particular financial situation or goals, please contact your Financial Adviser.

Volatility investment 101: Keep calm and carry on
Important information

The content on this website is for information only. The information is of a general nature and does not constitute financial advice or other professional advice. Before taking any action, you should always seek financial advice or other professional advice relevant to your personal circumstances. While care has been taken to supply information on this website that is accurate, no entity or person gives any warranty of reliability or accuracy, or accepts any responsibility arising in any way including from any error or omission. A disclosure statement is available from your adviser on request and free of charge.

 

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