Do You Have the Itch to Switch?
Do you have the temptation to change your investment strategy? Do you have the itch to switch?
During market volatility, many investors might be tempted to change their investment strategy, be it, where their money is invested or investment method, in order to temper fluctuations in the market.
Investment planning works with an overarching view of your objectives and is aided by an appropriate strategy. This will answer the age old question "should I switch?".
Part 1 - Strategy
Investment Strategy: Which of the following is most appropriate?
1. Stock-picking
2. Betting on alternative investments such as gold or cryptocurrency
3. Owning small pieces of major companies in the world
4. Keeping cash in the bank
Having a strategy is a pillar of your investment plan. It is a vehicle to have you moving to your intended destination.
The question is, which strategy is best suited to achieve your goals?
Owning specific stocks? Owning small pieces of every company? Or just to keep it at the bank?
While it is quite tempting to own shares of renowned companies or alternative investments that keep on popping up on the news, be it for their great profits or popularity. Let’s give it some thought. While a company could be extremely successful, not all can sustain success. It may not necessarily be caused by poor management, but it could also be a result of the industry evolution, government regulations, and many other external factors. Given the multitude of variables, what happens if the company ceases to exist, or if the company’s value plummets? The same could be said of alternative investments.
On the other side of the token, should investors then own small pieces of every major company around the world? The gist of owning a variety of shares in different companies is that collectively, the returns of the majority of the companies will offset the poor performance of other companies. As the investment is diversified, the return on the investment will be the average of all the companies invested in, thus reducing the risk of just owning one, or just a few companies.
Or should you take a more apparent route, keeping your hard-earned cash in the bank? You have the convenience of simply visiting a bank branch, having your money withdrawn, or even viewing the funds coming in and coming out from your mobile phone or computer. However, will the small amount of interest be sufficient to tackle inflation of 5% or more?
With the turbulence you have seen in the market, many investors would be wary and prefer for the storm to calm down, before making a move. However, you may want to ask yourself these few questions to make sense of your investment strategy.
Part 2 – Questions to Ponder
1. Are you clear about what your goals are?
2. Do you have sufficient cash for your short-term needs, i.e., 3-5 years.?
3. If you are not yet retired, are you investing enough?
4. If you are already retired, do you feel you are spending too much, or worried, therefore cutting back, when in fact you could be spending more?
These questions are to assist you in making robust financial decisions. If you are not clear on what your goals are, would a chat with your partner or adviser help? If you are clear, do you have clarity on the actions needed to be taken? If you would like to discuss your investments with your Adviser please get into contact with them for a review meeting.
Questions from Our Clients:
Judy, our investment client here at FoxPlan has asked, should she change the amount invested in shares to bonds, given the current volatility?
We really appreciate your question, Judy.
Historically, shares have been outperforming both cash and bonds in the long run. Over a 50-year run since the 31st of December 1970, New Zealand Equities have returned an average of 12.4%1, while New Zealand Bonds have returned 7.4%[1]. Over this period, inflation was 5.6% (Reserve Bank of New Zealand, 2022)
To put into perspective, if $10,000 was invested in New Zealand Equities and another $10,000 in New Zealand Bonds over the 50-year period, the funds invested in New Zealand Equities will be worth $3,859,099.
New Zealand Bonds? $376,543.
But inflation would have eroded the purchasing power of your $10,000 to $561.
While both Shares and Bonds surpass the rate of inflation, Shares over the long run do outperform the bonds.
[1] Annualised (p.a.) compound pre-tax return, return from both capital growth and income.
Adviser Commentary:
During market volatility, it is easy to react to new information in the news. It is important that we take a step back and consider how we could potentially use this to your advantage to help achieve your short, medium, and long-term goals.
With inflation at record highs, investing is a key component in retaining purchasing power and seeks to avoid your money going backwards
We are only a phone call or an email away should you wish to discuss this in relation to your situation. Please get in contact with your adviser or contact us on 0800 NO STRESS (0800 667 873) or email at info@foxplan.nz if you have any questions or would like your adviser to talk through your current investment plan.
If you are new to investing and want to learn more or want to explore your options why not book a discovery, no-obligation call with one of our advisers here:
References:
Booster Financial Services Limited. (2021). Investment Markets - Infographic. Retrieved from Booster: https://bss.booster.co.nz/api/download?ContentId=2526
Reserve Bank of New Zealand. (2022). Inflation calculator. Retrieved from Reserve Bank of New Zealand.