Over the past few days as global politics create uncertainty and global share markets have responded, I thought it would be good to reflect on markets and provide some perspective on what is happening and as investors, what can or should we do about it, especially when it comes to our investments & KiwiSaver funds.
The longer I’ve been in this industry, the more my perspective on market downturns—corrections, recessions, and the like—has evolved. These days, I see them quite simply:
- If you’re a buyer, it’s a win. Lower prices mean your money buys more shares.
- If you’re neither buying nor selling, it’s still a win. Rebalancing allows you to trade appreciated bonds for undervalued equities.
- If you’re a seller, it’s okay too. Your portfolio includes cash and bonds specifically for times like this—now is when they prove their worth. After all, if markets never declined, holding defensive assets would have been a mistake.
This is exactly why we have a long-term strategy that works in all market conditions. The defensive assets in your portfolio are there for times like these—you can use them now without needing to sell your shares. In fact, this can be a good time to rebalance and buy shares at lower prices.
During strong markets, you’ll see other investments taking off and people boasting about big returns. That doesn’t bother me. Those high-flying investments aren’t built for the long haul—they do well in good times but often fall hard when things turn.
That’s not what we do. We build portfolios designed to last a lifetime. We only invest in what we understand and protect the downside with defensive assets. We might not beat everyone, but honestly, I don’t mind. We’ll likely beat most, and more importantly, our investors should have peace of mind—and that’s priceless.
David Booth, founder of Dimensional Fund Advisers in the US, wrote a great article in the financial times (below) about the share market and why sticking to your plan is the best long-term outcome for you.
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In shaky times, investors should hold their nerve
By David Booth
When markets feel as shaky as they do now in the US and around the world, it is normal to ask: Is this time different?
After all, the S&P 500 Index (US index) is down some 15% already this year and there is considerable economic uncertainty. But anxious investors today should consider where the market was five years ago, and how well those who tuned out the noise performed.
Then, the COVID-19 pandemic had spread rapidly, and the US stock market dropped 34% in just 23 days—faster than ever before. The VIX index, a measure of investor expectations of volatility often called Wall Street’s “fear gauge,” hit a record high.
Yet within a year, the market had not only recovered, but also risen 78% from its lowest point. People who sold during the panic missed one of the strongest recoveries ever. Each uncertain period brings its own unique challenges, making it more difficult for investors to keep the faith.
When I talk with investors today, some point to tariffs, government debt, global tensions, or new technologies—all of which are valid concerns. But history shows us that markets have overcome every previous “unprecedented” challenge. The Great Depression, world wars, the inflation crisis of the 1970s, Black Monday in 1987, the Global financial crisis of 2008—markets have weathered them all.
Each crisis can feel like the end of the world when it happens, yet the pattern of recovery stays remarkably consistent. Over 50 years of working in finance has consistently shown me two things: We cannot predict the future, but despite that uncertainty, markets have eventually bounced back.
There are no guarantees, of course, but that is the way it has worked historically. When markets swing wildly, our instinct is to act to protect ourselves. Some investors respond by pulling their money out until things “calm down.” But this instinct typically results in lower returns than if you did nothing.
The impact of being out of the market for just a short period of time can be profound. Consider a hypothetical investment in the stocks that make up the Russell 3000 Index, which is a good benchmark for the broad US stock market.
A $10,000 investment made in 2000 turned into $66,038 for the 25-year period ending December 31, 2024. Over that same period, if you miss the Russell 3000’s best week, which ended November 28, 2008, the value shrinks to $55,114. Miss the three best months, which ended June 22, 2020, and the total return dwindles to $46,554, roughly losing 30%.
This does not mean you should never alter your investment mix. The key is knowing the difference between thoughtful changes based on your life events and hasty decisions driven by scary headlines. The first is smart financial planning; the second is more like gambling.
Companies are constantly seeking to solve problems and create opportunities. Some ideas may take off. Others may not. Investors are rewarded for taking on some of that risk. And because the risk is spread across literally thousands of companies, the stock market has positive expected returns even during stretches when the overall economy slows.
Markets have returned on average about 10% a year, which seems like a fair return, given the level of risk taken on. Successful investing is about picking the right portfolio—and having the right mindset. A disciplined approach helps you handle uncertainty without freezing up.
I have found that it helps to first, accept uncertainty as the cost of opportunity—higher expected returns are your “reward” for taking on greater risk. Second, it is important to match your investments with your life, not the news cycle. Third, find partnerships, not predictions. Working with a trusted financial advisor can help you create a personal plan that fits your goals and aligns with your values. I believe that understanding how markets work leads to better decisions.
Investors who grasp how markets function are more likely to stay in their seats during periods of volatility and reap the potential rewards of compounding. An investor who put $10,000 in the S&P 500 at the beginning of 1970 and simply let it ride would have more than $3 million today despite living through eight recessions, multiple wars, political upheavals, and technological revolutions that transformed entire industries. That is not because they were lucky—it’s because they recognized that the question is not whether uncertainty will appear, but how we respond when it does.
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