Why diversification matters in volatile markets

Staying steady through market ups and downs

When investment markets experience ups and downs (also called volatility), it can be alarming for investors. It’s understandable to feel unsettled when your balance dips and headlines are filled with uncertainty. But remember, volatility is a normal part of investing. Volatility is often triggered by things like changes in the economy, politics, inflation, or major global events. While we can’t predict when volatility will happen, we can be prepared. Incorporating diversification into your investment strategy can help manage risk. It can also help smooth out the bumps along the way.

What does ‘diversification’ mean?

Diversification means spreading your money across different types of investments. Instead of putting all your money in one place, you invest in a mix of assets. These could be shares, bonds, property, or cash. You can also diversify by investing in different industries and countries. This can help manage risk and smooth out returns. If one investment goes down, others may hold steady or even go up – keeping your overall portfolio more stable. The good news is that if you’re invested in the BNZ KiwiSaver Scheme or YouWealth, all the funds have been designed with diversification in mind.

How diversification helps in uncertain times

Reducing overall risk: During volatile market conditions, individual stocks and sectors can experience dramatic price swings. Investments focused on a single asset or sector can carry more risk. If that area performs poorly, it’s more likely investors will face significant losses. For example, a portfolio consisting only of technology stocks may face significant losses during a downturn in the tech sector. However, if that same portfolio also holds assets in consumer goods, healthcare, or bonds, these investments may help offset losses and stabilise returns. Diversification helps reduce overall risk by spreading investments across multiple asset classes, industries, and geographic regions.

Safeguarding against economic declines: Economic downturns and recessions often lead to widespread declines in stock prices. However, not all assets are affected in the same way. For example, when stock markets decline, government bonds may increase in value as investors seek safe-haven assets. Different investments react in different ways during tough economic times. A diversified mix of stocks, bonds, commodities, and international assets can help reduce the impact on your overall portfolio. Additionally, different industries perform differently based on economic conditions. While luxury and travel sectors may struggle in a recession, essentials like healthcare and consumer staples often stay steady or grow.

Avoiding impulsive investment choices: Market volatility can lead people to panic and make quick decisions, like selling at a loss. For example, someone might see their balance drop and switch funds or cash out too soon, locking in losses instead of waiting for a recovery. Having a well-diversified portfolio helps prevent panic by reducing the impact of any single asset’s price changes.

While no strategy can remove all risk, diversification remains one of the most effective ways to manage uncertainty and support long-term growth. When you invest in the BNZ KiwiSaver Scheme or YouWealth, professionals manage your money and spread it across different investments to help manage risk. While your balance will still experience ups and downs, knowing that your money is spread across a range of investments can help you stay calm and focused on your long-term goals.

Important information:

BNZ Investment Services Limited, a wholly owned subsidiary of Harbour Asset Management Limited, is the Issuer and Manager of the BNZ KiwiSaver Scheme and YouWealth. Download a copy of the Product Disclosure Statements:

• BNZ KiwiSaver Scheme Product Disclosure Statement (PDF 1.1MB)
• YouWealth Product Disclosure Statement (PDF 1.4MB)

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, including possible delays in repayment. You could get back less than the total contributed. No person (including the New Zealand Government) guarantees (either fully or in part) the performance or returns of the BNZ KiwiSaver Scheme or YouWealth, or the repayment of amounts contributed. National Australia Bank Limited, the ultimate owner of BNZ, is not a registered bank in New Zealand but a licensed bank in Australia and is not authorised to offer the products and services mentioned on this webpage to customers in New Zealand.

BNZ Investment Services Limited (BNZISL) uses the BNZ brand under licence from Bank of New Zealand, whose ultimate parent company is National Australia Bank Limited. No member of the FirstCape group (including BNZISL) is a member of the NAB group of companies (NAB Group). No member of the NAB Group (including Bank of New Zealand) guarantees, or supports, the performance of any member of FirstCape group’s obligations to any party.

This article is solely for information purposes  and is a summary based on selective information (which may not be complete for your purposes and does not take into account your individual circumstances). It’s not financial or other professional advice. Any statements as to future matters are inherently uncertain and are not guaranteed to be accurate or reliable. If you need help, please contact BNZ or your professional  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 opinion, information, representation or omission, whether negligent or otherwise, contained in this article.