We’re living in increasingly nervous times. Barely a week goes by without an economic pundit predicting the next big financial crash or economic downturn on the horizon.
If your portfolio is making you nervous, you’ve probably got the wrong investment strategy
Whether or not they’re accurate remains to be seen, but their statements can cause jitters and uncertainty among investors, with many questioning whether they should adjust their investment portfolios. Bernard Doyle of JBWere says that, if your portfolio is making you nervous, you’ve probably got the wrong investment strategy.
“You shouldn’t be losing sleep over your investment portfolio. In fact, quite the opposite. It should be giving you peace of mind, not sleepless nights.”
Since the Global Financial Crisis a decade ago, investors have had relatively smooth sailing on global stock markets that have seen high returns with only a few brief interludes of stormy weather. But because the GFC is still fresh in investors’ memories, there’s a tendency in some quarters to assume another economic downturn will become a similarly catastrophic global meltdown. Doyle does not believe that’s likely.
“The last financial crisis was extraordinary. It was the worst economic situation since the Great Depression. I don’t think the next downturn will be as bad as 2008. I can’t say it won’t be, but I don’t think it’s right to assume it will.
It takes a generation to change the investment mindset
“When I started in the share market in the mid 1990s, most New Zealanders I talked to said they’d never invest in shares again because of the 1987 crash that was their recent memory. It’s taken a generation to get rid of that mindset, and now people have the opposite view because the New Zealand share market has done so well.”
Doyle says the global share market cycle since the middle of last century has seen a dozen or so bear markets or periods when a market declines in value by more than 20 percent, but most of these events didn’t have the severe impact of the GFC, and in each case, markets rebounded to higher levels than before each downturn.
The next big one?
Speaking to OnMAS in mid-October during a timeof volatility on Wall Street that caused markets to wobble around the globe, Doyle was calm. He said events like the October wobble are normal and to be expected because we are in the final third of the long economic recovery that followed the GFC.
“At the moment, I’d put what we’ve seen in 2018 into the ‘rising risk’ category. The best statistic I have to summarise that is that, when you look at 2017, there were three days where equity markets fell more than 1 percent in a day, so that was a nice year really. This year, so far there have been 21, so that doesn’t necessarily mean things are going down but it’s definitely a bumpier ride.”
Crashes aren’t random events, there are warning signs
Doyle says there’ll be clues and warning signs before the next major economic downturn, just as there were in 2008.
“Investors don’t need to fear that any day they could wake up to a horrendous repeat of 2008 under way. The 2008 crash took two years to build up, so these aren’t random events.”
Economic slowdowns leading to recessions are the most common cause of tough periods on the market. These cause people to lose their jobs so they have less money to spend. This means companies are unable to raise prices leading to a fall in profits, and the knock-on effect of that is falling share prices.
So given all this, what should we invest in? Doyle says it all comes down to two things: how you feel about risk and how soon you need the money.
“The biggest indicator of risk appetite is to ask yourself if you need to touch the money in the next seven to 10 years. If that money is invested in the share market, I’d be confident that, over that period, you’d get a reasonable return, but I couldn’t say that with confidence over a one to three year horizon.”
As you go through life and your situation changes, you need to ask yourself this question again, and if the answer has changed, it’s time to change your portfolio. Doyle says this is particularly important as you head into retirement.
A lifestyle analysis will tell you which investment strategy is right for you
“If you’re needing to draw down from your portfolio to pay your power bill or to buy groceries, that automatically says to me you’ll be wanting a lot less shares and more bonds and cash.
“It doesn’t mean you should own no shares, but you need to complete a lifestyle analysis – what lifestyle are you expecting to have and what are your other sources of income or support.”
Benefit from the downturns
A weakened share market doesn’t need to be a bad thing if your risk horizon is further ahead. Those who panic and sell shares are missing out on what could be large gains over a longer timeframe as the market recovers, while those who buy shares at a lower price can benefit from these rises.
“When we’re advising our investors, we make tilts when we think markets are expensive. For example, we’ve made a small tilt away from New Zealand shares at the moment, but if the markets got really cheap, we’d say investors should own more.
“From time to time, you get these opportunities to do very well because the definition of a crash or crisis is sellers are panicking or have to sell, such as a fund manager who has had people withdraw from their fund.”
Doyle says there’s always a buyer, even in the worst part of a financial crisis, and those people with a long time horizon and a good tolerance for risk will be the ones to benefit.