When the markets are unstable, should I withdraw, change or stay the course when it comes to my investment strategy?

Knee-jerk reactions are common when investment markets are unstable, but whatever you do, resist making any withdrawals, or changes to your investment strategy without talking to your Britannia scheme adviser first.

For most investors, it’s important to stay the course when markets are unstable. This can be easier said than done when there is an economic downturn and you’re not sure what the future holds. The media tends to add fuel to the fire and as a result, investors are more likely to have a knee-jerk reaction, potentially either desperately buying or selling at the wrong time to deal with the fear of missing out or the fear of losing a hard-earned investment. The facts may reveal the situation is not as dramatic as is being portrayed. 

Investment markets have and will always rise and fall. This is normal, and history has shown us that markets have always recovered. The graph at the bottom of this article illustrates this point by showing that the average returns across one, three and five years, after a market decline, have been consistently positive, often significantly so.

The three most important things to remember when markets are unstable:

  1. Focus on your long-term goals. If the purpose of your investment is to save for your retirement remember that it’s a long-term investment. While it can be concerning to see your portfolio change rapidly due to fluctuations in investment markets - this year alone we have seen the markets yo-yo through a number of sizeable losses and gains - we encourage you to take a long-term view.

  2. If you move your money during a downturn in the market, two things might happen:
    • You can miss out when the inevitable market upswing occurs.
    • It may take much longer to recover your money.

  3. Switching funds may be the right thing to do for a few investors, but this probably would apply to them whether we were passing through the Covid-19 era or not. If an investor is close to, or is in retirement and needs extra reassurance, then more conservative investments might be appropriate.

The psychology of investing is similar to that of driving a car

With so many global events currently impacting the markets, it might be useful to compare investing, and in particular the importance of ‘staying the course’, to driving a car - something which most of us are familiar with.

Let’s explore a few examples:

  • You are driving on the open road when you see a parked police car watching for speeding cars. Instinctively, you slow down, even if you were driving safely and below the speed limit in the first place. However, once you’ve passed them you continue to drive slowly. The rationale being that there may be another team of police officers monitoring the same stretch of road.

    Similarly, people can panic when their investment value drops. Even after the moment has passed and the investment has at least partially recovered, panicked investors might change their investing behaviour, even though there is no need. A good example of this was in March 2020. Investors assumed their investment values would continue to fall. They were wrong.
  • Did you know that if you’re driving at 110km an hour, you’re only covering each kilometre three or four seconds faster than if you were driving at 100km an hour? Most people understand that speeding at 110km an hour isn’t worth the risk for such a tiny gain. After all, your goal is to reach your destination, not set a speed record.

    In the same way, investments are a vehicle to help you reach your financial goals and be able to retire comfortably in say 20 years. Seeking a little extra return may be worthwhile if it increases the chances of reaching your goal sooner, but you have to understand and accept the extra risk involved.
  • Have you ever been frustrated with the slow progress of traffic in your lane when you’re driving on the motorway during rush hour traffic? The lane next to yours appears to be moving faster, so you change lanes. As soon as you do, your new lane grinds to a halt. And the lane you left picks up speed and is now the faster lane.

    In the investment world, this is called ‘chasing performance’ and has caused the downfall of both inexperienced and experienced investors. Why? Because there’s no guarantee last year’s winning investment will behave the same way this year.

What does it mean to ‘stay the course’ in terms of investing?

One of the key requirements for investing is patience. Good quality, well-diversified investments should grow in value over time despite short-term ups-and-downs.

It’s worth noting that generally shares fall every five to seven years. And they may fall as much as a third in value. That’s an uncomfortable thought, until you remember that within five to seven years, they will likely have regained, and surpassed, the value they had when they fell. As a result, there are significant periods of time when shares deliver no returns at all. Wise investors are prepared for this, and plan accordingly. The reward is that you can expect to be paid significantly higher returns in the long run.

Any investment moves should be considered carefully in the context of your own personal circumstances. Talking this over with your Britannia scheme adviser is a wise idea, whether the markets are fluctuating or not.

If you have any concerns about your investments, contact your Britannia scheme adviser or give us a call on 0800 500 811, email us at investments@britanniafinancial.co.nz and let us know how we can help.

Average Returns after Downturn

The information contained in this article is of a general nature only and does not take into account individual circumstances. It is not intended to provide comprehensive or specific financial advice. Before making an investment decision you should talk to your Authorised Financial Adviser.


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Product Disclosure Statements for the Britannia Retirement Scheme and the Integral Master Trust are available from the Scheme's issuer, Britannia Financial Services Limited, phone 0800 500 811.

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