How investors can navigate the perfect storm

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David Boyle talking about how to cope with volatile sharemarkets.

David Boyle is head of sales and marketing for Mint Asset Management and is a regular personal finance contributor.

OPINION: I’m not sure if you have ever seen the George Clooney movie The Perfect Storm, but it was the best analogy I could think of, given how investment markets have been behaving since the beginning of 2022.

Everything that could have contributed to a negative return for investors has come together and created a market where there have been few safe harbours to shelter in.

The good news is, with a bit of courage, maintaining a strong constitution, and a steady hand at the helm, you will be able to navigate these current market conditions far better than George did in the movie and with a far better outcome I suspect.

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So, to set the scene, let’s look at the conditions that have got us to where we are today.

The key contributors have been rising interest rates, increased costs of oil and food, along with what I call the Covid ripple effect, which has led to domestic and global inflation.

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George Clooney holds on for dear life in The Perfect Storm.

These include, but are not limited to, most central banks around the world flooding global economies with cash, increased demand for goods and services outstripping supply (compounded by supply chains failing to meet that demand) and the dramatic increase in costs for pretty much everything.

When we throw in the Ukraine conflict and the impact this has had on fuel, energy costs and grain supply, we have seen inflation around the world going well above normal expectations. This has caused central banks to tighten monetary policy by raising official cash rates, with the markets pricing in future rate hikes for the rest of this year and next.

But hey, I don’t need to tell you what the impacts have been. If you have a car, go to the supermarket, booked overseas travel or have a mortgage, just to name a few things, the costs have only been going one way – and that’s up.

That has been quite the opposite to how your KiwiSaver and most other investment balances have fared over the same period.

So, this takes me back to my original message. What are the key things you can do now to help you maintain your course, whether it’s saving for your retirement or other long-term objectives, and get through this storm, hopefully sailing into some safer waters without sinking along the way?

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My mum always had baked beans on hand – and would stock up when they were on special.

The baked bean story

My mum had a pantry to die for. It was filled with tins of baked beans, spaghetti, corn, you name it and it was there. Way more than we would have ever needed in a month, let alone a year.

This was like many other grocery buyers back then, and even today. She took advantage of the current market conditions.

When you buy your tin of baked beans, say for $2, you will most likely buy what you need for the week or fortnight because that is the normal retail price. But what do you do when you see the same tin of baked beans on special for $1? Most likely you will buy more, right?

It’s the same tin of baked beans, just the price has changed. But what do you feel like doing when the share market goes down? Sell, because you feel that you don’t want to lose any more of your hard-earned savings.

Pause for a moment and consider whether this makes sense. The companies you are invested in, mostly, are still the same good-quality companies, just their price has gone down.

So, what should you do? Perhaps invest some more.

Easier said than done, but there is a way that you can do this without even thinking about it, and that leads me to the second lever that can help your cause.

Iain McGregor/Stuff

Dollar-cost averaging helps smooth out the highs and lows of the market waves and intuitively does what you would normally do at the supermarket.

Dollar-cost averaging

If you have been in KiwiSaver or managed funds and making regular contributions, you have been doing this without even thinking. Let me explain. Taking an extreme case, if you pay $100 each month into your investment, and the price of each unit in the fund was valued at $1, you would buy 100 units.

If the next month you invested your $100, but the market dropped by 50%, you would get 200 units. If the next month you put your $100 in and the price had gone back to a dollar, you’d once again buy 100 units.

In this very simple case, you would have invested $300, but the value of that investment would be $400.

Dollar-cost averaging helps smooth out the highs and lows of the market waves and intuitively does what you would normally do at the supermarket.

Time, not timing the market

If you have a crystal ball in the cupboard then ignore this one. For everyone else, this is all about having that strong constitution, so you ride out some of the market waves.

To quote Warren Buffett: “The only value of stock forecasters is to make fortune-tellers look good.”

I have learnt from personal experience that trying to time the market is generally a fool’s game.

For example, if you invested into the S&P 500 from 2001-20 you would have received an annualised return of 7.5%, but if you missed just 10 of those days during that period you would have received only a return of 3.4%.

Miss the top 20 days and your return would have been 0.1%. The key here is to focus on the long-term objectives of your investments, ride out those market fluctuations, and get some professional personalised advice if you have concerns that your long-term destination might need some expert navigation.

The eighth wonder of the world

It was reputed that Albert Einstein said compound interest was the eighth wonder of the world. The power of time and interest earning interest means you will reap the rewards, while taking some of the short-term risk we are all currently experiencing this year.

Bring all these components together and, with an appropriate asset allocation determined by your investment objectives, you will in most cases be able to weather most, if not all, the market storms you are likely to face over your accumulating years.

Add a personalised plan to the mix, via a licensed financial adviser, and you will upgrade your fishing boat to a super cruise liner, which, while not always pleasant to be on during a storm, will see you through to calmer seas.

The above article is intended to provide information and does not purport to give investment advice. Mint Asset Management is the issuer of the Mint Asset Management Funds. Download a copy of the product disclosure statement here.