Short term behaviours can negatively affect long term returns

By Steve Baker, Authorised Financial Adviser, 22 April 2020

It is a perfectly normal human emotion to feel concerned or even stressed during times of extreme share market volatility, as we have been experiencing during the last couple of months because of Covid-19. After all, none of us wishes to see our investments fall in value.

However, it is how investors react now which will likely determine their long-term investment future. Investment decisions made purely on short term factors could be regretted down the track. This is because history tells us many investors fall into the trap of buying when share prices are high and selling when they are low. This is exactly the opposite of how it should work! Click here to learn more about the behavioural mistakes investors make.

I have been reading a number of articles from around the world saying how advisers are rushed off their feet as clients have been contacting them in a panic about their investments. As an experienced team of advisers at Saturn Advice, we can honestly say this is not our experience. But why?

Many of our advisers have been around the block a number of times with a few grey hairs to show for it and have experienced a number of major share market corrections and crashes over the years, including the Global Financial Crisis. This has taught us how to react in such situations and to set client expectations from day one. At Saturn Advice we try not to sugar coat things. Transparency is one of our founding principles and by telling it like it is, we are educating our clients and preparing them for when markets fall. That way, our clients don’t unduly worry.

Here are 5 things I think you should consider before committing to an investment strategy:

1. There may be periods where your investments experience large ups and downs from share markets and you need to be able to handle the downs as well as the ups.
2. If you are invested for the long term, short-term events while potentially stressful, are unlikely to have a significant impact on your long-term returns.
3. If you only want to invest for the short term, shares are probably not the place to be.
4. Do falls in the value of your investments keep you awake at night? If so, you may need to revisit your investment strategy and consider taking less investment risk.
5. Don’t panic, stay the course, and stick with the plan.

Unfortunately, not all investors are as well prepared for downturns in the market as can be seen from the recent panic from investors in KiwiSaver Schemes where a significant number appear to have changed from Growth to Conservative funds at exactly the wrong time. A number of these investors are experiencing a major market downturn for the first time, have probably not sought advice, and reacted in line with the ‘sell low’ mistake I mention above.

At the time of writing, share markets have recovered some of their losses. We don’t know whether or not this bounce is temporary and we may yet re-test market lows.  What we do know is markets will be quite volatile over the coming months. So this is not the time to try to time the markets as prices can change swiftly, even within one day, on the back of ongoing uncertainty in a rapidly changing world.

In summary:

• don’t panic sell;
• don’t make short term decisions you may later come to regret;
• do keep your investment discipline;
• do expect that across your years of investment share markets will suffer periods of decline, and
• do expect in the long-term, shares will continue to offer you the best prospects to grow your investments.

If you are concerned about your investments and would like a guiding hand, please contact us.

The views expressed in this article are the views of the author. The information provided is of a general nature and is not intended to be personalised financial advice. You may seek appropriate personalised financial advice from a qualified Authorised Financial Adviser to suit your individual circumstances.