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Major turning point

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Bruce McLachlan, Chief Executive

Major turning point

We are all guilty of it. Delaying buying or selling something today because we hope it will be cheaper (or dearer) tomorrow. The trend is our friend we hear. These thought processes are what drive many markets, in that many trades are driven by either fear or greed, rather than intrinsic value. “I must buy that house today as it will be more expensive tomorrow”, has been a major driver of the last five year expansion in Auckland house prices — when in effect it is still the same asset. It will be interesting if house prices fall 10% in the next year, whether buyers celebrate because houses are cheaper, or hold off because they think prices might fall further. Markets, you have to love them as an insight into human behaviour.

Major turning point

As investors, the decision to buy or sell is in the forefront of everyone’s minds right now given global share markets are enjoying close to the longest bull run in history. The outcome of the New Zealand election similarly has investors trying to guess whether the time is right to buy or sell. Many will answer that they will wait to see the trend that emerges, and get on the back of it. Others will do nothing, but feel immensely pressured and tense by whatever trend emerges.

The New Zealand election certainly ended up being a far more engaging process than almost all pundits predicted at the beginning of the campaign, and in the end had all of the drama and theatre that only Winston Peters can deliver in forming the new coalition. But what now for investors? What should I do with my KiwiSaver account? Should I stay in growth assets? Should I move my assets offshore?

We believe investors should consider three things when making these decisions.

The first thing to remember is that long term investors should ignore short term market goings on. It is pure luck trying to pick the top or bottom of markets. There are plenty of studies that prove time in the market and making sure you get the full benefit of compounding returns over the course of years is key. The best advice is to ignore all of the noise in between.

The second thing to consider is that markets are quite efficient at processing existing information. However it is the unexpected or the contra view that is often mispriced and drives the major market moves. Don’t think you can beat the market if you get your information from the newspapers — you have the same information as everyone else.

The third thing is that rather than fear the big market swings, embrace them. Make sure your investment selection matches your true risk profile and investment horizon, and view every market move as a real opportunity.

So what should you do as a result of the New Zealand election? With certainty we can say that there is going to be an elevated level of political, social and potentially economic change. That represents risk and this risk is not yet priced into markets, as we still don’t know the exact policy direction of the new government. This risk is most likely to be seen through movements in the value of the New Zealand dollar. For us that means focussing on our currency management and hedging strategies while this uncertainty exists. New Zealand economic growth, long term interest rates and inflation are strongly influenced by global factors and volatility in these is less likely as a result of the election.

The key message though is to resist the natural human bias to act. This is especially important when the newspapers are full of advice about what is going to happen. We know that the future is rarely that clear. Instead, we believe that patience is truly a virtue. Don’t try and predict the future, but prepare for it by having the right long term investment strategy in place. That way as markets go up and down, governments change and the unexpected happens, you can relax knowing that your strategy is right and your investment goals will be met. A clear strategy allows you to enjoy your investing experience rather than live in fear. This is all way easier said than done.

 

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