As at the end of October the value of the New Zealand share market was below the level reached immediately prior to the onset of Covid, almost four years ago. Recent experience has been even more challenging, as we achieved an interim market peak in early 2021 and we are more than 20% below that peak at the end of October.
The situation is very similar for our Australian neighbours with their share market also back at price levels last seen in 2019. The United States share markets have fared a little better, as the technology heavy parts of their market have been bolstered by the promise of artificial intelligence technologies. However, they were still down more than 10% from their peak in January 2022 and back at levels last seen in April 2021.
When you combine the impact of share market contractions with the reality that for most New Zealanders the value of their largest financial asset (their home) has contracted by 13%, it means that family balance sheets have taken a battering.
It is at times like these that I must remind myself (and my clients) that we all have a "negativity bias", meaning that we tend to pay more attention to negative information than to positive information.
In my career I have worked with clients through four "bear markets" — i.e., periods where share markets have fallen by 20% or more. And I have to say, for clients and advisers alike, the emotional rollercoaster is always tough. If I didn’t care about my clients, then it would be easier, but for me, caring deeply about client outcomes is a critical part of being a good adviser. However, at times like these it is important the adviser stays as dispassionate as possible to help their clients make logical decisions. This often involves reflecting on the following realities:
1. Each new bear market tends to feel new or different, but in reality, it isn’t. The initial trigger of a bear market may be different each time, but the processes are a natural part of investment markets finding a new equilibrium and not the forerunner of a cataclysmic event.
2. Bear markets do not last for ever, it just feels that way. Over the past 50 years there have been seven bear markets. The average decline is -38% with the average duration being 14 months. A share market recovery often occurs ahead of an improvement in the general economy. This means the bottom of a bear market is only identified in retrospect and often occurs when the media are particularly negative.
3. Holding a diversified portfolio helps you to weather a bear market but it does not make you immune to them.
4. The temptation to change your portfolio in response to a bear market can be huge, but this is analogue to driving forward while looking exclusively in the rear-vision mirror. If the logic behind the construction of your portfolio is sound, and your investment goals are unchanged, then "sitting on your hands" could be the most appropriate response.
5. The question that is often asked is "can we sell at the top and buy again at the bottom?". Unfortunately, the evidence is clear, while market peaks are evident in retrospect, picking them in advance is virtually impossible. Furthermore, to be successful you also need to know when to buy back into the market. The transition phase between bear to bull markets is often characterised by sudden and episodic moves up. For this reason, it can be dangerous to be out of the market for even short periods (i.e. just a few days).
6. The option to move into cash and then re-enter the market when conditions seem more stable is tempting, but it is a dangerous illusion. Research shows that 90% of the investment return you receive is due to your asset allocation. Maintaining an appropriate mix of investments is much more likely to help you achieve your investment goals than trying to time the market.
But, to finish on a positive note, since the start of November, we have seen a strong uptick in both local and international markets.
Could this be the start of the next bull run? Possibly, but if not, I do know one thing: history tells us we are now one day closer to the next recovery.
— Peter Ashworth is a principal of New Zealand Funds Management Ltd, and is a Dunedin-based financial adviser. The opinions expressed in this column are his own and not necessarily that of his employer. His disclosure statements are available on request and free of charge.
