Is the New Zealand market overvalued in 2015 and how will this affect your investment decisions?
Risks are rising with current global uncertainty in economic centres across Europe, China, Australia and the States. Closer to home our reliance on the dairy industry is exposing New Zealand’s economy and has pros and cons. For example, exporters win as they become more competitive globally, but cost of goods go up for us local residents. Managing your investment portfolio and reassessing your appetite for risk is prudent. Do you have cash to capitalise, if and when the market falls and opportunities are created? Are you prepared for long term “ups and downs”? Depending on your personal circumstances it might be time to take profits and review your portfolio strategy.
As always consider your objectives and evaluate your tolerance for fluctuations. Long term investment strategies trump others.
Here’s a snapshot of what we think is worth considering.
1. Higher Risk Growth investments vs Lower Risk Income Investments.
It’s been a few years since the 2008 market crash, it bears remembering the tech boom in the early 2000s (which was compounded by 9/11), and with time comes increased confidence… check your portfolio mix as a percentage of high risk growth vs low risk income and ask yourself “Should history repeat tomorrow, will there be tears or an opportunity to take advantage? Will a 50% drop in share values cripple my portfolio or enable me to increase holdings?” Allocate assets according to your life stages and cash position. Over the years you may have deviated and literally grown up into a new stage of life.
2. Diversify, Diversify, Diversify
People say “don’t put all your eggs in one basket” for good reason, especially when it comes to high-risk investments. Diversifying can help minimise losses during market downturns because different types of investments are less likely to be adversely affected by the same market developments. For example, if you have investments in property and shares, your property value is unlikely to be adversely affected merely because the share market goes down.
3. Interest rates affect more than just the housing market.
As a general rule, when interest rates drop (or even are predicted to drop), share prices go up. Even though NZ’s current interest rates are low relative to the past they’re still higher than we’re seeing internationally and the trend is likely to continue… they may just keep falling.
4. Don’t confuse “time in” the market with “timing” the investment markets.
Some investors try and pick the highs and lows, or when to get in and out of investment markets. For many investors, trying to time the market actually results in lower long term returns. By trying to time the market, you may find that you miss a strong period of growth and therefore may not achieve the same result as someone who had got in and stayed in. Shares, like other growth assets, tend to provide you with an uneven ride, but the potential rewards of sticking to your long term investment strategy can be higher than investing it in other more conservative assets, such as cash and bonds.
5. Use Dollar Cost Averaging
Dollar cost averaging is an investment strategy designed to reduce risk. It involves making many smaller investments over time (instead of all at once) so risk is spread throughout investment cycles. For example, if you use dollar cost averaging you might invest $1,000 every week for 100 weeks rather than investing $100,000 in a single investment.
6. Withdrawing/changing your investments after a period of negative return may cause you to realise a loss.
While your funds are invested, it generally moves with the “ups and downs” of the market (with varying degrees depending on your portfolios’ exposure to shares). Once you withdraw/change your investment after a period of negative return, the loss will have been realised. Changing the funds to a “cash type” investment may look like an attractive alternative, but historically investors who have held their investment during periods of market uncertainty have tended to perform better than those who have withdrawn their funds and invested in cash after a period of negative returns. It’s important to appreciate that over a shorter timeframe, such as 3, 6, or 12 months, market uncertainty can seem quite dramatic. However, short term uncertainty can be less significant when viewed over a longer time frame such as 10 years.
7. Learn more
When it comes to investing it pays to seek advice from an Authorised Financial Adviser (AFA) who can help recommend a plan to suit your individual circumstances and long terms goals. Regular reviews with your AFA are imperative to ensure you stay on track.
Regards, Bill O’Brien, Managing Director Montage Financial Services.
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