When you invest your money – whether in KiwiSaver or any other financial investment – you enter a new world with a sometimes-daunting language. To help you navigate this, here are some of the commonly used terms and their explanations below.
Bull and bear markets
My father was a stockbroker, so I was introduced to investing at a young age. He had a large coin he would flip that had a bull on one side and a bear on the other – a playful reference to bull and bear markets. But what does it mean when market conditions are described this way?
Put simply, a bull market occurs when the value of shares that are traded on stock markets are on the rise. And a bear market occurs when the value of these stocks falls for a continued period. Investors themselves can be labelled as bullish (they think the market is heading upwards and tends to indicate positive investor outlook) or bearish (they think the market expectation is negative). While there are no strict definitions for these terms, a fall in value of more than 20% from a recent high is generally considered to be a bear market. A fall of between 10-20% is known as a correction.
In bear markets, investors may be tempted to move their money out of shares while they wait for the bull market to return. But we know that timing the market is nearly impossible so there’s a high chance this will cause investment losses. This leads to the adage my father also taught me: time in the market is more important than timing the market.
Dollar cost averaging
Dollar cost averaging is an investment strategy that aims to reduce the impact volatility has on your investments over time. We talk about this idea all the time – most often during periods of market volatility. But we don’t always use the term itself.
Dollar cost averaging simply means making regular contributions to your investment account, whether markets are up or down. When the market dips, you’re buying assets or investment units at a lower price, which puts you in a good position to take advantage of a recovery. Committing to a dollar cost averaging strategy can help you avoid some of the common investing mistakes that can have a negative impact on your returns. Because of the way KiwiSaver is designed, most members make regular contributions to their account through their salary or wages, which means they are using this strategy without even thinking about it. But you can also set up regular deposits if you’re invested in a non-KiwiSaver managed fund too, like BNZ’s YouWealth.
We talk a lot about the benefits of diversification, which means spreading your investment across different asset classes like shares, bonds and cash; industry sectors like, healthcare, technology, and utilities; and countries. The idea is that doing this lowers your risk because, when some assets classes or sectors are experiencing problems, others will be doing well. Remember the saying: “don’t put all your eggs in one basket”? That’s what we mean by diversification.
One of the key benefits of investment options like the BNZ KiwiSaver Scheme and YouWealth is that you get broad diversification through each fund (even the Cash Fund, which invests in a wide range of cash and cash-equivalent assets).
Liquidity refers to how quick and easy it is to sell an asset. When small or large amounts of an asset can be sold quickly and simply at the market price, we say the asset is liquid. If it takes some time to sell small or large amounts of an asset, or you have to accept a price that’s different to the market price for large amounts, it’s considered to be illiquid. For example, listed company shares are generally considered to be highly liquid, whereas direct property investment (like a commercial building) is generally considered to be an illiquid asset. That’s because it can take weeks or even months from when a property is first listed for sale to when settlement happens.
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.