This is an abbreviated article, based on information sent to Moneyworks investment and membership clients on 16th June 2022.
Listening to the news in the last few weeks can be unsettling if you haven’t been through a market downturn before. And many of our clients haven’t, as the last major downturn was from 2007-2009 (Not including the brief Covid Crisis in March 2020 where markets bounced back far more rapidly than most people expected).
It can be unsettling even if you have been through a downturn before, but if you have been there, you know that things bounce back, it is just difficult to know when.
There are a few points to remember:
These lower values are temporary. They only become permanent if you panic and cash the investments in.
You are investing for the long term, and markets and the value of your investments will go back up again.
This is as long as you have investments that are genuine businesses (ie they aren’t created from air – like a number of companies were in the 1980’s in New Zealand) and there is not fraud or too much leverage/lending.
The investments that Moneyworks has recommended to our clients are real businesses and the vast majority of companies aren’t over-leveraged.
It is your fund managers responsibility to understand the real situation of companies that they are investing in and check for any fraud. We have confidence in the fund managers that we have recommended to you.
If you are retired and using money from your investments to live off, the retirement savings analysis that your adviser has done for you assumes that there will be volatility and generally assumes that you will live for a long time. Ideally you will have kept money separate for your living expenses in cash or term deposits to reduce your worries at times like this.
There is little to be gained in checking your investment values regularly – particularly when the markets are adjusting (as they are now). This is only likely to cause you anxiety.
Please note that these comments may not be relevant for investments that are speculative (like crypto currencies, NFT’s) or that are complicated multi-layer higher risk fixed interest or equity investments or synthetic or derivative investments.
Bull and Bear markets
The two animals associated with investment markets are bulls and bears. A bull market is when the markets are continually increasing (like they have been for the last 11+ years) and it is claimed that this is because when the bull attacks, the bulls’ horns are pointing upwards – so – going up.
A bear market is when a market has fallen 20% or more from its peak, apparently because when a bear attacks its claws are pointing downwards, therefore a down market. (These are apocryphal explanations – please don’t hold us to them!)
There are varying opinions about how long a bear market will last, some numbers we found indicate that there have been 26 bear markets (not including this one) since 1928 and every bear market is followed by a bull market. On average shares drop by about 36% in a bear market and rise by about 114% in a bull market.
Markets can surge during the bear market (some of the biggest gains can happen during the bear market), and bear markets last between 289 and 363 days.
Remember, this is from peak to peak. The S&P500 peak of 4,796 was on January 3rd and today it is 3,789.99 – a fall of 20.98% (but it was 22% lower yesterday). The Nasdaq (technology index) on the other hand peaked on the 16th November 2021 at 15,973 and today is at 11,099 – a drop of 30.50%. The New Zealand lead index peaked on January 8th 2021 at 13,558 and is now 10,738 – a fall of 20%.
Extrapolating, (for what it is worth), today (June 15th in the USA), it has been 163 days since 3rd January, 212 days since 16th November 2021 and 524 days from January 8th 2021.
This is also why we recommend investments across all different asset classes and geographic markets, providing diversification.
Which of my investments have been impacted? Just about all of your investments that aren’t cash or term deposits will have a negative return year to date and many will have a negative return for the last 12 months.
This includes your fixed interest funds, as we have an unusual situation where interest rates are increasing at the same time that share prices are falling.
This is also why we have different funds in your portfolio. Each fund manager concentrates on different areas of investment (there is some overlap) and sees the world differently. There is one fund manager that we have recommended that has seen the world negatively for a number of years, and their investment performance has suffered because of that. But their negative outlook is now doing well for them and they have not been sitting on a loss so far.
What should you do? Nothing, unless your situation has changed since we last had a discussion about your situation.
If you have funds to add to your portfolio, there are definitely some bargains to be had, so you will be buying cheap. This is not the time to move your investments to a different risk profile or to cash in investments unless you need money.
When will markets go up again? Sorry, no crystal ball, no idea.
However, in three webinars/commentaries yesterday, there is a common belief that markets will settle down when inflation stops increasing. It is possible that this could happen in the next month, it could take several months or longer.
Remember though, that markets look a long way ahead and build in expected impacts. For example, today the US Federal Reserve (their equivalent of our Reserve Bank) increased their equivalent of the Official Cash Rate by 0.75%). Since the end of last week, markets have been anticipating this, (in fact some commentators were expecting an increase of 1.00%).
It is not possible to ‘time’ markets (to guess when they are their peak and at their bottom). It is almost like there are silent triggers for the markets to turn (unless there is a black swan event like there was with the Covid Crisis). Today could be the bottom of the markets, or it might be in 3 or 6 months, we don’t know.
Again, the markets will go back up. The real investments that you are invested in will go back up. We know it is hard at times to deal with, but please have faith, this is the sixth or seventh market correction that we have seen, and we know that the system works.
Do you want more information?
The best overview that we have found is the podcast today from The Daily at New York Times – ‘The Claws of a Bear Market’. Try this link https://www.nytimes.com/2022/06/15/podcasts/the-daily/bear-market-recession.html.
This also explains the relationship between bear markets and recessions.
If you are nervous or unsure about what is happening and what more information, contact your adviser to arrange a discussion.