Market Volatility

If the thought of market volatility makes you feel uneasy, this handy resource is just what you need. Read on to learn more about what ‘market volatility’ means at your stage of life, how to get comfortable with it, and most importantly, how to capitalise on potential opportunities.

Where are you in your retirement planning journey? Depending on your stage of life, some strategies can be timelier than others. Click below to choose your lifestage.

STARTING OUT? HERE’S HOW TO MANAGE MARKET VOLATILITY.

Are you in your late teens or 20s, and just starting out in your financial life? Volatility plays a different role at different stages of life. And it’s never too early to know and apply some key principles. Click below to see some steps you can take now.


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HOW TO MANAGE MARKET VOLATILITY AT THE ‘GROWING’ LIFE STAGE.

We call the lifestage between your early 30s and mid-40s ‘Growing’, because it’s usually when the financial seeds you’ve planted are starting to bud. The journey to retirement has well and truly started, and you need to make it as comfortable and fruitful as possible. Click below to see some ways to make the most of volatility, rather than hiding from it.

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HOW TO MANAGE MARKET VOLATILITY IN THE ‘CONSOLIDATING’ LIFE STAGE.

At this stage (usually between age 45 and 55, but it depends on individual circumstances), retirement is still some way off, but the planning gets more serious and details are refined.
To see how to make the most of market volatility at this stage in life, rather than avoiding it, click below.
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HOW TO MANAGE MARKET VOLATILITY WHEN NEARING RETIREMENT.

If your planned retirement is less than 10 years away, you may be concerned about the impact of volatility on your savings. But market volatility can still be your friend, even at this stage of life.
So, click below to see some key things to think about, to manage volatility without giving up on growth.
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HOW TO MANAGE MARKET VOLATILITY IN RETIREMENT.

After decades of hard work and planning, here they are – your golden years. So, how can you manage market volatility and make your nest egg go the distance? Click below to see some key things to do.
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Market Volatility and Retirement Savings

Where are you in your retirement planning journey? Depending on your stage of life, some strategies can be timelier than others. Click below to choose your lifestage.
Starting

STARTING OUT? HERE’S HOW TO MANAGE MARKET VOLATILITY.

Are you in your late teens or 20s, and just starting out in your financial life? Volatility plays a different role at different stages of life. And it’s never too early to know and apply some key principles. Click below to see some steps you can take now.


Hidden member only content, please login to access

Growing

HOW TO MANAGE MARKET VOLATILITY AT THE ‘GROWING’ LIFE STAGE.

We call the lifestage between your early 30s and mid-40s ‘Growing’, because it’s usually when the financial seeds you’ve planted are starting to bud. The journey to retirement has well and truly started, and you need to make it as comfortable and fruitful as possible. Click below to see some ways to make the most of volatility, rather than hiding from it.
Hidden member only content, please login to access

Consolidating

HOW TO MANAGE MARKET VOLATILITY IN THE ‘CONSOLIDATING’ LIFE STAGE.

At this stage (usually between age 45 and 55, but it depends on individual circumstances), retirement is still some way off, but the planning gets more serious and details are refined.
To see how to make the most of market volatility at this stage in life, rather than avoiding it, click below.
Hidden member only content, please login to access

Nearing

HOW TO MANAGE MARKET VOLATILITY WHEN NEARING RETIREMENT.

If your planned retirement is less than 10 years away, you may be concerned about the impact of volatility on your savings. But market volatility can still be your friend, even at this stage of life.
So, click below to see some key things to think about, to manage volatility without giving up on growth.
Hidden member only content, please login to access

Retired

HOW TO MANAGE MARKET VOLATILITY IN RETIREMENT.

After decades of hard work and planning, here they are – your golden years. So, how can you manage market volatility and make your nest egg go the distance? Click below to see some key things to do.
Hidden member only content, please login to access

Understanding Market Volatility

For many investors, ‘market volatility’ often conjures up images of plummeting share prices and economic uncertainty. But despite its bad rap, market volatility is a natural part of the market cycle. In fact, what if we told you that volatility can be your friend?
Here are some key thoughts to put things into context.

Market Volatility is Normal

Investment markets frequently go through periods of heightened volatility, which means they fluctuate in value. So, market volatility is neither the exception nor intrinsically negative. Prices can fall but they can also rise rapidly due to a variety of factors, including changes in investor sentiment, economic indicators, and political events.
Markets will always go up and down. And the reality is, upswings couldn’t happen without downswings.

Your investment horizon matters.
When markets are choppy, this can make some investors nervous. But unless your investment horizon is shorter than 10 years (for example, because you’re nearing retirement), you’re probably a long-term investor and likely have time to ride out the storm.
In other words, if market volatility doesn’t have the potential to compromise your retirement income, you can probably afford to accept the ‘downs’ and stay put. Just check that your risk profile hasn’t changed and that you’re invested accordingly: if so, you can probably trust your plan and focus on the long haul.
Markets have always recovered.

There’s nothing quite like historical data to help put recent market volatility into perspective. Take bear markets and bull markets in US history, for example.
A common technical definition of ‘bull market’ is when the market increases at least 20% from a recent bottom. Its counterpart is a ‘bear market’, when the market drops at least 20% from a recent peak.
Now, looking at the table below, you’ll see that since the Great Depression of 1929, the S&P 500 has experienced 26 bear markets, not including the current one.

 

Start and End date Price Decline Length in days
September-November 1929 -44.67% 67
April-December 1930 -44.29% 250
February-June 1931 -32.86% 98
June-October 1931 -43.10% 100
November 1931-June 1932 -61.81% 205
September 1932-February 1933 -40.60% 173
July 1933-October 1933 -29.75% 95
February 1934-March 1935 -31.81% 401
March 1937-March 1938 -54.50% 390
November 1938-April 1939 -26.18% 150
October 1939-June 1940 -31.95% 229
November 1940-April 1942 -34.47% 535
May 1946-May 1947 -28.78% 353
June 1948-June 1949 -20.57% 363
August 1956-October 1957 -21.63% 446
December 1961-June 1962 -27.97% 196
February 1966-October 1966 -22.28% 240
November 1968-May 1970 -36.06% 543
January 1973-October 1974 -48.20% 630
November 1980-August 1982 -27.11% 622
August 1987-December 1987 -33.51% 101
March 2000-September 2001 -36.77% 546
January 2002-October 2002 -33.75% 278
October 2007-November 2008 -51.93% 408
January 2009-March 2009 -27.62% 62
February 2020-March 2020 -33.92% 33

Source: Ned Davis Research, 12/21.

And here’s the important bit: in the same period, there have also been 27 bull markets. What’s more, bear markets lasted on average 289 days (9.6 months), while the average length of a bull market was 991 days (2.7 years).

Of course, past performance is never indicative of future performance – but it’s still a pretty strong indication of how market cycles work. No one knows how the market will move next, but if you give it time, it will likely recover.

How to befriend volatility
Remember: drops in value are not real losses until you sell your investments or withdraw the money, crystallising the loss.
Many people think that they need to protect their savings from volatile markets, maybe ‘hiding’ them in lower-risk investment options. But again, unless retirement is around the corner, by doing so you may actually miss out on further growth opportunities – and potentially put a dent in your financial future.
So, managing volatility is not about protecting savings. It’s about mitigating but also taking advantage of risk to grow your savings in the long run. In fact, trying to avoid the worst days may mean missing out on the best days: according to Ben Nevis research*, half of the S&P 500 Index’s strongest days in the last 20 years happened during a bear market.
There is a phrase we commonly use when talking to clients about volatility: ‘time in the market’, not ‘timing the market’, is the recipe for long-term investment success.
Good reads to learn more

If you’re looking at delving a little bit deeper, here are some good reads we recommend:

  • Six months are responsible for all of the gains in the US stock market since 2000 (OfDollarsAndData.com) – In this compelling article, Nick Maggiulli from Ritholtz Wealth Management LLC highlights just how difficult it is to pick the ‘best days’ in the market. So, the best way not to miss them is to stay invested as much as possible.
  • What if you only invested at market peaks? (AWealthOfCommonSense.com) – Meet Bob, the world’s worst market timer. Financial planner and blogger Ben Carlson imagines how things would go down for Bob if he tried to invest only at market peaks.
  • One more prediction for 2023
    (AWealthofCommonSense.com) – “The stock market will have a correction in 2023” is not really a prediction, but more a ‘safe bet’ as the share market has a correction every year. With handy graphs and data, Ben Carlson tells us that risk is easier to predict than returns.

Getting Comfortable with Volatility

Now that you know that volatility can be your friend, it’s time to get comfortable with it. So, here are some key principles to follow.

Whatever you do, have a plan
When markets are volatile, it’s easy to turn your attention to short-term movements and make emotional investing decisions. But emotions and investing don’t mix well: the result is often bad market timing.

Be proactive rather than reactive.

What you need is a plan, a clear map that you can turn to when things get a little uncomfortable. Just make sure it’s flexible enough to make adjustments, and also structured enough to keep you on track.
One strategy we have found that works well with some of our clients is to prepare an investment policy statement (IPS). This document provides a framework to refer to when making decisions about your investment. This can be particularly useful during times of increased market volatility or a significant market downturn, as it helps to take the emotion out of any decisions.

A market downturn doesn’t mean you’ve lost money

This is particularly important to note. Seeing the value of your investments drop can be disheartening, of course. But remember: those are just ‘on paper’ losses, not real ones. In other words, you haven’t actually lost any money yet.
The only way to ‘turn ‘on paper’ losses into real losses is to sell or switch your investments at a loss (for example, if you switch from a higher-risk to a lower-risk fund when markets are low).
Unless something material has changed in your situation, or your timeframes have changed significantly, in most cases, the best strategy is to ride out the storm!

It’s about ‘time in the market’, not ‘timing the market’
Investment markets can move in unpredictable directions, and no one – no matter how experienced or educated – can guess where they’re really headed next. This is why you need to take a long-term investment approach, rather than try to pick the best and worst days. In fact, trying to do so can lead to missed opportunities and losses.
By staying invested, you’re not only giving your investment time to bounce back from drops in value, but you can also potentially benefit from compounding returns over time (if your investment returns are reinvested and earn returns of their own).
Consider dollar-cost averaging
Ever heard of dollar-cost averaging? It’s a great principle to follow in times of market volatility, and it’s all about making regular contributions as opposed to lump-sum investments – just like your KiwiSaver plan does.
For example, you may invest $200 every month in a managed fund or an investment app like Sharesies or Hatch. By investing a fixed dollar amount on a regular basis, regardless of market conditions, you automatically buy more shares when prices are low and fewer shares when prices are high. Over time, this averages out the cost per share. Plus, it helps you remove some of the emotional impact of market fluctuations and build a disciplined investing habit.
Diversify, diversify, diversify
If you put all your eggs in one basket, what would happen if the basket dropped? It’s a powerful image that illustrates quite well why you need to diversify your investment strategy – both across asset classes and within them.
Remember: investments generally entail some level of volatility, but not the same level, and often not at the same time. By having a diversified investment strategy, not only you can limit the impact of market volatility on your overall portfolio, but you can also capture returns from different sources.

Volatility is just one risk

When it comes to retirement planning, market volatility is just one of the risks potentially affecting your savings (both before and after retirement). Your retirement planning and related investments will need to consider other risks such:

Inflation risk
Planning for retirement can be challenging because of the many variables that come with it, many of which are outside your control.
For example, with enhancements in medicine and health, life expectancy is increasing. So, suppose you have enough money saved to fund the first 20 years of retirement, until you’re 85 (in line with the current life expectancy of 82.65 years). Now, what happens if you live until you’re 95, or even 105? You will probably outlast your retirement savings and run out of money during retirement.
This is the longevity risk. So, what can you do about it? To ensure you have enough income to last, it’s probably safe to assume that you will live well into your 90s. This means having to plan for 25 to 30 years: how will your spending needs evolve as you age? And have you factored in a buffer for unexpected expenses, like expensive house repairs or healthcare costs?
Longevity risk
Inflation can also impact the value of your savings, because it erodes your purchasing power over time.
It’s important to note that inflation risk is always there, not just when inflation is high (like the current levels of over 7%). In a well-performing economy, you may still find inflation at 2% or 3%, and even small increases in the cost of living can have a significant impact on the value of your money over time.
For example, with an average annual inflation rate of just 2.5%, a $4 carton of milk could end up costing almost $7.25 after 25 years. It’s easy to see how this can be a problem for retirees: as the cost of goods and services increases, a fixed amount of retirement savings will be able to buy less and less.
The solution is not just saving more. You also need to ensure that your savings are invested in a way to minimise or – better yet – outpace the effects of inflation. In other words, you need to invest at least some of your savings in assets that have the potential to grow faster than the inflation rate on average – like shares.
Sequencing risk
Imagine working hard and saving all your life, only to experience a significant market downturn just as you’re about to enjoy the fruits of your labour. This is the sequencing risk.
Timing is critical in retirement planning, and a run of negative returns close to retirement can be difficult to recover from. Also, withdrawals during market downturns tend to be more costly than the same withdrawals when markets are performing well.
While it’s not possible to control the performance of the share market, there are ways to manage sequencing risk. Both the dollar-cost averaging strategy and the ‘bucket’ (or cascading) approach are ways to mitigate this risk and withstand negative returns over time. Plus, don’t underestimate the power of diversification – which brings us to the next point.
Diversification risk
Let’s say you have a basket with all your eggs in it. If you accidentally drop the basket, you will lose all your eggs at once. However, if you have several baskets, each with a few eggs, and you accidentally drop one basket, you will still have other baskets with eggs in them, and your loss will be limited.
Similarly, if you invest all your money in one investment asset type, sector or market, and that performs poorly, you could lose a significant portion of your investment. However, if you diversify your investments across different types of assets and sectors, if one asset type or market performs poorly, the rest of your portfolio could balance out the losses.

Help is at hand

A quick KiwiSaver-question? We're here to help. Is it time to take a good look at your financial plan? We can help there too. From simple queries through to advice for retirement, investment, and financial planning, we welcome you to get in touch.

Help is at hand

A quick KiwiSaver-question? We're here to help. Is it time to take a good look at your financial plan? We can help there too. From simple queries through to advice for retirement, investment, and financial planning, we welcome you to get in touch.

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