How to invest when the world has changed

Rising interest rates, soaring energy prices, and growing geopolitical uncertainty has sent shivers running through the investment markets. 

The lofty valuations of 2021 may have made sense in an environment with low inflation, low interest rates, and high corporate earnings. But now, the world has changed.

Across the globe, inflation is running at multi-decade highs, central banks are aggressively hiking interest rates, and corporate earnings growth is slowing. Markets are reacting negatively, and the S&P 500 index of US shares is down over 20% this year.

This dramatic paradigm shift was articulated last month by Reserve Bank Govenor, Adrian Orr.

Others echo this sentiment. Global asset manager GMO sees higher food, energy, and fertiliser prices as inflation risks in the short-term due to impacts on fertiliser exports from Russia and Belarus, alongside higher energy prices in Europe. 

Longer term, it sees declining populations and climate change as key inflationary and growth hurdles. The analysts comment that no country in the developed world has a replacement birth rate, and China, the engine of global growth for decades, is aging rapidly. The costs of adapting to climate change are expected to slow growth, while an increase in extreme weather events is likely to impact food and energy prices.

Reading this might be making your head spin, but it's important to keep in mind that the world has navigated great change before. The vast majority of people keep their jobs in recessions and survive wars and pandemics. But even in the splendid isolation of fortress New Zealand, international events can and do impact us financially. So, how should you invest when the world has changed?

Don't hold on for dear life

In the market euphoria of 2021-22, speculators piled into assets many inherently knew little about. Spurred on by each other through online forums like 'Wall Street Bets,' these punters helped fuel the meteoric rise of several 'meme stocks' and crypto currencies. Whenever these highly volatile assets fell in value, speculators reassured each other with catch cries like HODL (hold on for deal life) or BTD (buy the dip).

This wasn't particularly sound advice. For example, since last November, the combined value of crypto currencies has fallen by more than 1 trillion dollars, and the prices of big names like Bitcoin and Ethereum are down around 70%.

Many of the amateur investors flocking to share trading apps have been raised on the virtues of contrarian investing, citing famous quotes like Warren Buffet's, 'be fearful when others are greedy, and greedy when others are fearful'.

But there are caveats to this advice. Firstly, if the price of a useless asset falls by 50%, it is not necessarily 'cheap', and it is still useless. And secondly, to quote another famous investor and economist, John Maynard Keynes, 'markets can remain irrational longer than you can remain solvent'.

This advice is especially important today. Do not rush into this market just because prices have fallen. Yes, markets may bounce, but they may also remain flat or fall further this year. It's critical that you don't overextend yourself. Rising interest rates are challenging for both markets and economies. It would be unwise to use your savings to bet on markets bouncing quickly in an environment where your job could possibly be at risk. 

A sensible goal is to act like an investor, not a speculator. Investors take a systematic approach to growing their wealth, buying assets with reasonable risk in exchange for long-term growth. Speculators, on the other hand, buy assets that may experience rapid growth but can also lose their entire value if they all out of favour. 

Four ways you can act like an investor

1. Take a long-term view and understand time is your ally. Time enables investment returns to compound and exponentially grow your wealth. The difference between saving $20,000 in an aggressive fund at age 25 instead of 35 could be up to $35,000 extra at retirement*. Time also helps you offset volatility, to ride the ups and downs and potentially achieve higher returns overall. It's true there have been some frightful years in investment market history, but these aren't the norm. Over the last century or so, the S&P 500 Index has posted positive annual gains roughly 75% of the time.

2. Understand your investment timeframe to take more calculated risk. If you're 40 years old and saving for retirement, consider a growth or aggressive fund. This type of investment is more volatile in the short term than lower risk funds, such as conservative or moderate, but is expected to generate higher returns over the long term. On the other hand, if you're saving for an overseas trip in the next year or so, a term deposit or cash fund may be a good option. 

3. Recognise your risk appetite. The last thing you want is to be constantly worrying about your investments, even if intellectually you know you have made a sound investment decision. In these situations, it can make sense to talk with a MAS Adviser or make the decision to trade some potential upside for some actual sleep. 

4. Diversify your investments. If you're like most Kiwis, your wealth is mainly tied up in your family home or bank deposits. This represents a very concentrated portfolio. The world is changing, and the future is open, so it can be a good idea to spread your bets. Some investments will fail while others will succeed beyond your expectations. Diversification helps you balance out the bad with the good to ensure your capital remains protected. 

Putting it all together

These principals can be combined to create a long-term investment plan. In fact, if you have a KiwiSaver account, you may be already doing this; contributing regularly into a diversified fund that's aligned to your risk appetite and investment timeframe.

The final step is to keep up your regular contributions, especially when markets fall. This will make your dollars go further as you're buying more assets than you were previously when valuations were higher. It's a bit like buying skinny dipped chocolate almonds on special. You're still spending $10, but now you're getting two packs instead of one. This investment rule is called 'dollar cost averaging'. It helps you offset short-term losses by acquiring long term assets at temporarily lower prices.  

Responding to a changing world

When the world changes dramatically, we can feel compelled to react accordingly. While this might be appropriate in some instances, it isn't necessarily true for your investments. Overcome your impulses by thinking like an investor. Focus on your investment timeframe, understand your risk appetite, and diversify your portfolio. Then ensure you're contributing regularly to use down markets as an opportunity to increase your holdings at lower prices. 

This way, you can harness change and transform it into opportunity. 

Jules Riley

Senior Growth Manager, Investments, MAS

We're here to help

At times like these it's important to keep your long-term goals in mind. While fluctuations in your account balance can be unsettling, it's reassuring to know that you can speak face-to-face with your dedicated MAS Adviser at any time. They can work with you to develop a sound investment plan and help you stick with it during challenging times. There is no cost to speak with a MAS Adviser, and because they are not paid commission, you can be sure they have your best interests at heart.

Contact us here to book an online or phone meeting with a MAS Adviser.

Other useful links and tools

We also have useful online tools to help you:

Our Risk Profiler Questionnaire can help you see if you're in the right fund for your circumstances.

Our KiwiSaver Retirement Calculator can help you understand if your retirement savings are on track.

If you decide to change your fund after reviewing your risk profile or meeting with a MAS Adviser, you will need to complete an investment strategy change request form. There is no fee for switching.

MAS KiwiSaver Scheme investment strategy change request form

MAS Retirement Savings Scheme investment strategy change request form

You can seek weekly updates on fund unit prices and returns on our website:

MAS KiwiSaver Scheme weekly fund unit prices updates

MAS Retirement Savings Scheme weekly fund unit prices updates