What To Do With Investments?
It was only two articles ago I was writing about the stellar performance of international investment markets and quoting returns in excess of 20% for equities in 2019. Share markets were being driven higher as the alternative investment options weren’t providing sufficient returns (bonds at historically low interest rates) or had other issues (property with limited liquidity and Government restrictions).
The article finished with suggesting those returns were locked in if you took some of your money off the table. But, where would you put it? One option was debt repayment (which has always been a favourite “asset class” of mine.
I doubt any of us actually cashed in equity portfolios and given the markets continued strength in January and February - Wall Street was up 3.5% reaching its all time high of 29,551 on 12 February - it seemed to be the right decision. The NZ share market added a further 5% at the start of this year reaching its high on 20 February.
Within 5 weeks (23 March) the USA equity market had shed
-37% and in NZ -30%. Note this date was even before New
Zealand had entered its Level 4 lockdown.
In the following four weeks both markets have staged remarkable, if somewhat fragile and volatile, recoveries. Both markets are up over 30% (as at 19 April).
It’s easy to present you with a series of numbers and record the results after the fact - more importantly what’s the point?
Well, what this serves to highlight is that provided you have set up your investment strategy to fit your long-term planning goals there is peril in adopting short term views driven by market sentiment. The old saying goes “It is time in the market not timing of the market” that drives performance.
For example, as the coronavirus spread and it became a worldwide pandemic, daily performances of share markets were swinging wildly with 8-10% movements up or down not uncommon. The announcement of the lockdown and the expected impact on the economy could well have been a reason to move to the sidelines and cash out. By doing so not only could you have sold at the lowest point in the market (March 23) but you could also have missed the 30% recovery over the ensuing four weeks.
Where the equity markets will go over the next 4 weeks, 6 months, 12 months or 2 years is unknown. There are many factors that will affect this - health, economic and social factors will all be included in the mix at the macro level for the world going forward. What we are likely to experience is continued volatility. However, it would be a brave man to bet against equity markets not being higher in 5 years than they are today. If your investment horizon is +5-10 years then you might be better served confirming your investment strategy is right and avoid looking at market performance for the next 12 months. You could save yourself from possibly reacting in a rash manner that would only exaggerate your position or losses. It is natural in traumatic times to act more conservatively. But, as highlighted above, a short period out of the market can lead to missed opportunities.
What else can we take from the current environment. Well, just as a good investment strategy should serve us well, a good debt management strategy is prudent. It has been very easy (especially in a low interest rate environment) to take on debt. Whether that be for upgrading the family home, a new car or refurbishment of the dental practice. If you have a range of debt - mortgage, business loan, consumer debt (hire purchase or store cards), vehicle finance, personal loans or outstanding credit card balances - now might be the best time to consolidate and or revisit your plan to manage and repay these.
However, be aware that if you are reconfiguring debt, penalties may apply. Similarly, if you are on a Fixed Home Mortgage Interest Rate and want to take advantage of the current low rates there are likely to be break penalties applied.
It would be fair to say that New Zealanders have love affairs with their homes. It falls into both categories of lifestyle and investment. For many it will be the only significant investment in their lifetime. The balance between affordability, value and pleasure is very much an individual’s perspective. A home, in terms of borrowings, is usually the most affordable (interest rate wise) as it provides the lender with low risk security. In the good times when incomes are high and stable, asset values have continued to rise and we have experienced the “wealth effect” - we feel richer because we are. This has led to an increase in debt because we have had an improving personal balance sheet but not necessarily cashflow.
The recent Reserve Bank forecast and projections paint a very gloomy picture of the short- term future - double digit unemployment, massive increase in government debt, many small business closures and a fundamental shift for some sectors (tourism and education are just a couple of examples).
The challenge for the government will be to get the economy going and people spending again. History tells us that after each economic shock (Great Depression of the 1930’s, Wall Street crash of 1987 and more recently the Global Financial Crisis of 2008/09) that people became more conservative, were more reluctant to spend and ‘Cash was King’. Baby-boomers will recall their grandparents talking about having a “rainy day fund” (3-6 months of living expenses). Maybe more of us might just actually get one organised.
It is certainly interesting times we live in. Finance and investments are all about the ‘numbers’. Ultimately you need to accumulate enough assets during your working lifetime to fund that period of life (retirement) where you no longer work. Both strategies will help you to achieve that goal. Whether today that means confirming you are on the right track, consolidating your position or possibly having to make some tough decisions, understanding your ‘numbers’ will give you the peace of mind of knowing your position. We’ve all heard the adage ‘knowledge is power’. Having a financial plan will go a long way towards reducing financial stress which we know is a big factor in relationships and mental health. Now is always a good time to review your own financial plan.