Why You Shouldn’t Panic About October’s Market Turbulence
Sensationalist headlines such as NZ share market tumbles in one of its worst days ever and NZ and US share markets drop sharply can send alarm bells ringing among KiwiSaver members and investors. But it pays to remember that media outlets compete to get their news in front of you and the strong headlines are a key way to do this.
We keep repeating the importance of trying not to panic. Keep calm and carry on to realise your long-term plans. Weather the storm. And we mean it.
Long-time investors and those who belong to KiwiSaver will be all too familiar with a bit of market turbulence and weathering the storm, but if you’re new to investing or are feeling uncertain about the market, let us break down the current situation for you into easy-to-understand terms.
What happened to the markets in October?
There are always many factors that influence change, but on this occasion market disruption was led by the United States, and one of the biggest causes was an increase in interest rates.
Firstly, interest rates rose for a couple of reasons. Influences such as a stronger economy and reduced unemployment rates in the US led the Federal Reserve to increase interest rates. Increasing interest rates was a way to help them to avoid rising inflation. However, higher interest rates make life harder for businesses, which have to pay more to borrow money, and it potentially erodes profits, which has a cascading effect across the global market when share prices fall in response.
Secondly, the International Monetary Fund reduced the growth outlook for the global economy by 0.2% as a result of the rising interest rates and disputes over global trade.
Tech stocks reacted in the US, and those stocks known as FAANG members (Facebook, Apple, Amazon, Netflix and Google) reacted with a sharp fall in value. Technology shares are often seen as key drivers for health in the share market.
Shares also reacted across Europe and in the United Kingdom, Asia and the Pacific, collectively affecting client investments to a lesser or greater degree depending on their investment plans.
The media are referring to the market as having gone from a bull market to a bear market – what does this mean?
Put simply, a bull market is a market that encourages buying stock and a bear market is a market that encourages selling stock. Usually, bull markets are associated with rising stock prices and bear markets are associated with falling stock prices. You may have seen the balance of your KiwiSaver account or investments dip as a result.
AMP Capital has said that a deep bear market is unlikely, meaning the October event was more of a correction than a slump, and it was also commented that periodic corrections of 5-15% are healthy and normal.
Should I re-evaluate my investments?
This depends entirely on your personal goals and investment plan. Why are you investing, and what do you hope to get out of it? You need to consider your aversion to risk, the diversification of your portfolio (how varied your investment mix is), your personal circumstances and the all-important timing of your plans.
Whether it’s your investment portfolio or KiwiSaver, there’s a chance that you’ll wind up locking yourself in at a loss if you make any panic-driven decisions to deviate from your investment plan during a market dip. However, if you ride out the ups and downs, it’s more likely that you’ll be better off long term. Regardless of the market, it might be time for you to review your investments if you have a change in personal circumstances looming, such as retirement, buying a house, starting a family or getting married, to make sure you’re on track. It doesn’t hurt to pause and take stock of where we are in life and if our choices still work for us.
If you have any doubts, air your concerns with your Adviser and let’s weather any storms together.
“A thousand-point gain or a thousand-point decline does not alter the fact that we are saving for retirement or building up funds for education.” – Don Connelly, Speaker, Motivator, Educator.
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