Market volatility – Q&A with Peter Forster

There’s no denying financial markets have been jumping around a lot recently, which is impacting investment balances. This volatility is expected and part of the investment journey – we know it feels unsettling so we asked BNZ’s General Manager of Wealth, Peter Forster, to answer some of the common questions we get at times like these.

How long will this volatility continue?

The short answer is nobody has a crystal ball so it’s impossible to know for sure. But we do expect it to be around for a while longer. Uncertainty is what drives volatility and there’s a lot to be uncertain about at the moment. How long will it be before inflation around the world starts to level off? How long will China maintain its zero-Covid policy? Will the US economy slip into recession? Will the Ukraine war escalate or come to a peaceful resolution? We expect volatility to continue in financial markets while questions like these remain unanswered.

What should I do if I see my balance dropping? Should I change my fund choice?

There’s no need to panic or make knee-jerk decisions. Market downturns happen; they are a part of investing. You can spend your time worrying – focusing on the short-term turbulence and wondering what you need to do now or what the market might do tomorrow. But it’s far better to step back and take a few minutes to check you’re in the right type of fund for your circumstances, because our funds are designed with ups and downs in mind. Some investors try to stop any losses by switching to a more conservative fund after they see their balance drop – but doing this risks locking in the losses and missing out on the recovery when it happens.

Should I keep putting money in?

If you could avoid the bad days and invest only on the good ones when markets are up, you’d see great results. But unfortunately, it’s impossible to predict when those good and bad days will happen. When markets drop, the value of any existing investments you have may fall. However, your regular contributions also allow you to snap up additional investments at a lower price. This means that as markets eventually stabilise and recover – as history has shown us tends to happen – the value of the investments you bought at the lower price will typically increase as well.

What should I be looking for in an investment provider?

What I think about when it comes to investing is a fundamental approach that works well and delivers quality outcomes for investors through the full range of market conditions. Our approach is based on three core things:

The first is diversification. That means holding different types of assets across many sectors, in different parts of the world, because they tend to react differently to the many influences that cause market movements. Diversification helps to reduce risk and should lead to higher investment returns over the long term.

The second factor is liquidity. This means investing in assets that can be easily converted to cash without losing too much value. Investing in lower liquidity assets (such as sub-investment grade bonds) can increase returns but it also increases the risk that you won’t be able to access your funds when you need them. Liquidity is even more desirable during periods of market unrest.

The last factor we look for is quality. Investing in higher quality assets has been a sound approach over time but it’s even more important during times of uncertainty. Take fixed interest investments like bonds, for example. We look to buy bonds issued by companies and countries that have a stable outlook and are financially sound. We don’t buy higher risk (junk) bonds that are more likely to fail and have their value written down to zero.

So, what’s the overall message to investors?

It’s important to stick to a plan that’s right for you, given how long you’re investing for and your appetite for risk. Investors who have chosen a fund option that’s right for their circumstances shouldn’t need to react to day-to-day movements in financial markets.

Any views expressed in this article are the personal views the author and do not necessarily represent the views of BNZ, or its related entities. This  article  is solely for information purposes and is not intended to be financial advice. If you need help, please contact BNZ or your financial adviser.

Neither Bank of New Zealand nor any person involved in this article accepts any liability for any loss or damage whatsoever which may directly or indirectly result from any, information, representation or omission, whether negligent or otherwise, contained in this article.

BNZ Investment Services Limited, a wholly owned subsidiary of BNZ, is the Issuer and Manager of both the BNZ KiwiSaver Scheme and YouWealth. A copy of the relevant Product Disclosure Statement is available on bnz.co.nz.
Investments in the BNZ KiwiSaver Scheme and YouWealth are not bank deposits or other liabilities of Bank of New Zealand (BNZ) or any other member of the National Australia Bank Limited group. They are subject to investment risk, possible delays in repayment, possible loss of income and possible loss of principal invested. No person (including the New Zealand Government) guarantees (either fully or in part) the performance or returns of the BNZ KiwiSaver Scheme or YouWealth, nor the repayment of capital.