Be proactive, not reactive

There will always be ups and downs in the market: volatility is a natural feature of investing. But rather than reacting to it, it’s important to be proactive. This involves selecting an investment strategy based on your risk tolerance, rather than making impulsive decisions.

The longer your investment timeframe, generally the more short-term volatility your investments can probably handle, as they have more time to recover. Additionally, diversifying your investment portfolio is another proactive approach. You could start by building a foundation with a KiwiSaver plan, and gradually expand your portfolio over time.

Start diversifying your retirement income sources

When it comes to managing volatility, it’s also appropriate to consider diversifying your future retirement income. There are different income-generation tools available, each carrying its own risks and benefits. These include (but are not limited to):

  • KiwiSaver
  • A paid-off house
  • Building or acquiring a business
  • Property investments
  • Shares and mutual funds
  • Bonds.

At this stage of life, you might start exploring some of these avenues if your financial situation permits. Many people start building their financial life with KiwiSaver, then add their first home to the mix. In time, this can pave the way to an investment property, and maybe a wider property portfolio.

Alternatively, if you own your own business (or plan to in the future), this could provide the framework for retirement income or a nest egg.

Don’t crystallise reduction in investment value.

A market downturn doesn’t mean you’ve lost money. In fact, you haven’t lost any money until you sell your investments or switch them when the market is low.

This is what happened during the Covid-related downturn of March 2020, when many people switched their KiwiSaver funds to lower-risk options in an attempt to protect their money from anticipated volatility. However, all they did was sell when the market was low, and subsequently miss out on the recovery only a few weeks later.
This highlights the importance of staying the course, by investing according to your risk profile. In a nutshell, if your risk profile and your circumstances haven’t changed, you can probably ignore short-term market movements and focus on the long term.

De-risk only if you’re buying your first home

When managing volatility, a lot depends on your investment goal and time horizon. If retirement is your primary focus, you may want to invest with growth in mind to maximize your returns over the long term.

But if your goal is to buy your first home soon, you may need to de-risk your home deposit investments and focus on more stable options, to ensure your savings are secure until you have the keys to your new home. Once that’s done, you can refocus your strategy on the long term.

Use dollar-cost averaging

Timing the market is nearly impossible, and making one-off lump sum investments can be risky. That’s where dollar-cost averaging comes in. By making regular contributions, you can take the guesswork out of buying a fluctuating asset and take advantage of buying at a lower cost when the market is low.

If you’re employed and contributing to KiwiSaver, you’re already using this strategy. Every month, both you and your employer make contributions to your account.

But dollar-cost averaging isn’t just limited to KiwiSaver. You can also apply this strategy by regularly investing a set amount in other managed funds. This allows you to steadily build your portfolio over time and potentially benefit from market fluctuations.