Over the last 8 or so years, we’ve had an incredibly good run in the world stock markets.
Over this time, the S&P 500 (500 of the biggest companies in the US) is up 274% and the NZX50 is up 226%. If you’ve started investing in the past few years or so, you’ve likely known nothing but awesome returns. Lucky for you!

NZX50 over last 10 years

In Game of Thrones (for the 3 people reading this article that haven’t watched it), the seasons last for years and years. It’s been summer throughout the whole series. Unfortunately, as all those moody guys covered in furs have constantly been reminding us, “Winter is coming”.

Stock markets often function in a very similar way; a prolonged period of growth (summer) followed by a prolonged downturn (winter). Right now we’re in the middle of a period of massive investing growth – it’s been one heck of a summer!

As always, though, those moody guys in furs (these days, in their business casual blazers) have been constantly going on about how doomsday (a.k.a. Winter, a.k.a. A market bust) is imminent.

Is Winter coming?

Yup, no two ways about it. Stock markets are cyclical, they boom and they bust.

I get a lot of people saying that we’re “overdue for a crash” or that they don’t want to buy at the ‘top of the market’. These might seem like logical ideas, but my response is always; how do you know?

I don’t claim to have any idea what the short-term future will bring for the stock market, and trying to predict what will happen is a complete waste of time. It’s also completely pointless listening to anyone who claims they do know. Because they don’t unless they’re time travellers.

Here’s what I do know: Stock markets boom and bust, but give GREAT returns over a long period of time.

There is no reason to assume there will be a massive crash at any given point in the future. One thing you need to remember is that current share prices reflect the prevailing sentiment people have about what the near future will hold.
What this means is that if everyone’s worried about what the near future will bring, stock prices will go down because of it.

I never have any opinion one way or another about what the near future will bring, which means I think any time is a good time to start investing.

Children of Summer

When summers last for years in Game of Thrones, there are children born who have never known anything but good times – the children of summer.
If you’ve started investing, or contributing to a KiwiSaver scheme, in the last 8 years, congrats! You’ve only known great times in the stock market and are a child of summer.

Because of this, a lot of us have no idea what it’s like for our investments to drastically decrease in value. This can and does happen – and it sucks – but it’s certainly not the end of the world.

How are you going to react when Winter hits? What would you do in the big one?

Whether next month, next year or five years from now, a big stock market winter will roll in. Our KiwiSavers and investments will likely fall by 20%, 30% 40% or even more. If you remember the global financial crisis of 2008-2009, you’ll know that shit got bad.
It’s worth taking some time to think about what you would do in that situation.

My girlfriend just told me she’d cash out all our money and buy a shotgun, which I consider to be a slight overreaction.

These guys are ready

Take a minute and think about your investments and KiwiSaver. How would you feel if they were worth 30% less today than they were a year ago? Probably not great (understatement!). Perhaps you would you be tempted to sell up or switch to a safer KiwiSaver fund to stop your assets haemorrhaging money. 

It’s easy to stick to a plan when everything is going perfectly. As Mike Tyson said, “Everyone has a plan until they are punched in the mouth”

This is why before starting investing, it’s so important to have your time frame in mind.

If you’re planning on cashing up to buy a house in a year’s time, you shouldn’t have a significant amount of your money in shares or be in a growth KiwiSaver fund. This is because you’re at a risk of a downturn over the next year decreasing the value of your investments and significantly impacting how much you can put towards a house.

#handymansdream

If you know that you are investing for the long term, it won’t matter if your investments fall by 20% over the next year. You can generally be confident that summer will return; your investments are almost certain to recover and grow in the next few years. You’ll be fine.

How did I react during bad times?

Waaaaay back in the day, I was an Apple shareholder when the price of their shares was sinking like a stone. It fell by almost 40% from late 2012 to mid-2013. It sucked.

I knew much less about investing back then and my shares losing value felt absolutely awful. I vividly remember waking up every morning and checking my stock app and feeling physically sick when seeing a large negative % next to Apple.

I thought a lot about panic selling, but fortunately, I was too indecisive. I didn’t sell up and boy did Apple’s share prices recover!

WHATEVER YOU DO, DON’T PANIC SELL

The best way to make sure you get poor investment returns is to panic and sell off when the market is on the way down. This effectively locks in your losses. Imagine people who sold while the S&P500 was at it’s lowest in 2009. They either had to buy back those shares at a higher price when the market went up again, or they missed out on the future returns entirely by not being able to afford to buy them.

This is one of the biggest reasons why most people make less than the market average return. They buy and sell at the wrong time because they either think they can time the market themselves, or listen to the people who falsely claim they can do it for them. Can I just add that listening to the business casual doomsday blazer guys is equally unprofitable.
Do your own good thing and stick to it.

How can you profit when things turn bad?

One way to think of downturns in the sharemarket is that this means you’re now getting your shares for a discount!
Imagine units of a fund which tracks the S&P500 fall from $5 to $4. Effectively this means you’re now getting a 20% discount. Practically making money.

Dollar cost averaging is a great way to ensure you profit from downturns in the sharemarket. Quick recap: Dollar cost averaging is when you make regular purchases of shares (preferably monthly). If you make a purchase for the same amount of money every month, this means you get more shares when their value is lower.

Remember that every single share market winter has been followed by a summer.
EVERY. SINGLE. ONE. Winter is coming, but summer’s never too far behind.

Action steps

  • Think about your investments and KiwiSaver and how you would handle it if they fell in value.
  • Think about your investing timeline. Are you planning to cash up in the next few years?
    • If you are, consider whether your current KiwiSaver fund type is appropriate and whether you have too much money in risky assets like shares.

 

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