Investment is the engine that drives our future financial health.
And so, when investment markets fall, as they did during February, we can feel uncertain, uncomfortable and that we need to do something (even though the best action, more often than not, is to do nothing).
It’s worth noting that sharemarket returns have been generally positive in recent years. And while there have been recent falls, markets are still above where they were one year ago. But we’re humans. We like certainty. And we like to know why something is happening.
It would be nice if there was a straightforward explanation, a direct line of cause and effect. But sometimes markets just fall for no apparent reason. Somewhere a piece of information or an event has triggered a reaction. And that reaction has spread.
Is it the end of the world? Should we panic or significantly change course? No. Generally economic news is good and economies continue to grow. Arguably, after years of good returns, markets might need a rest and to consolidate. But there’s no significant inflation, central bank policies remain generally cautious, borrowing and debt is now better regulated.
What will happen next? A human foible is that we don’t have huge predictive power about what is going to happen but believe we do. We tell stories to make sense of what is happening around us, we believe in rules of thumb and formulas that make a complex world simpler.
And yet the world is complex, ever-changing and filled with billions of people undertaking daily activity which collectively leads to outcomes for markets. How can we accurately predict that or even know with certainty what the trigger was?
Additionally, in offering explanations for what has just occurred, we somehow believe that makes sense of the future as well. And we then base investment decisions on this flawed analysis.
Uncertainty is the source of risk in investing. Should that put us off? No, but our time would be better directed to how much we should be saving each month given current circumstances to create the retirement outcome we want and then continuing to review that as the future unfolds. On the base of a well-diversified and thought-through retirement plan in the first place, of course.
We might not be able to predict our near-term future but we increase our certainty the further out we look. Growth investments such as property and shares will be more volatile than cash and fixed interest but will deliver us higher returns with good probability over longer periods and thus increase our retirement saving outcomes.
Stephen McFarlane is an adviser with NZ Funds Private Wealth in Timaru. The opinions expressed in this column are his own. A copy of Stephen’s disclosure statements are available on request, free of charge.