One feature of market psychology is that investors have a tendency to think things will continue along their current trajectory forever. In recent years markets have been remarkably stable. This is measured in financial market terms by the volatility or variability of returns. Many investors started to believe the market would continue to stay stable and/or that volatility would even fall. After a long period of stability some were taken by surprise by stronger than the market expected US payroll data released on Jan 26 which triggered a sharp sell off. This was exacerbated by the pressure of forced selling from highly geared investors who had been betting things would stay stable. This activity, which shocked many, is really just a natural feature of markets. There are five things you should remember about markets:
1. Moves like this in markets happen
We may not remember at this point, but stocks fell more than 12% in the US summer of 2015 and 13% in early 2016. These corrections are all but forgotten because stocks recovered relatively quickly. Volatility is a normal feature of markets and we should never assume that periods of low volatility will last forever.
2. Your response to the recent moves tells you a lot about you DNA as a risk taker
If you feel really nervous, can't sleep and feel the need the check the value of your investment daily it might be a sign you are taking too much risk. It might be time to rethink your investment strategy. The right strategy is one you can live with in difficult as well as buoyant times. Fisher Funds is here to help with this.
3. Where you are at in your investment journey makes all the difference
Many of our KiwiSaver and investors who make regular contributions should embrace falling prices. Falling prices means the investment you make today will likely reap better rewards over the long run. You are invariably richly rewarded for embracing risk at the right times. If you are nearer the time you need access to your money your investment strategy ought to embrace less risk.
4. Active investors use volatility to their advantage
Fisher Funds is an active investor. We have the ability to use volatile markets to make changes to portfolios that we believe will add value over time. For instance our fixed interest portfolio manager David McLeish has been positioned in shorter maturity bonds so protected clients during the rise in interest rates. Similarly Sam Dickie our New Zealand equity portfolio manager has been using weaker prices to build our position in new portfolio investment A2 Milk.
5. Fundamentals are all that count in the long run
For me personally this is what I fall back on in tough market environments. Just because a bunch of investors lost money beating the markets would be stable and were forced to sell shares, the demand for Fisher and Paykel Healthcare's infant Optiflow nasal hi flow oxygen canula did not change one iota. Luckily for mums worried about their babies, hospitals don't look at whether the Dow was up or down before purchasing life saving equipment like this. Similarly Americans are still getting CSL's flu medication regardless of the share market. These companies, as well as the others in Fisher Funds' portfolios, are fundamentally sound, high quality and are growing. The chance to buy shares in world leaders like these at lower prices is one we should all embrace.