Note: Though this column has been written in the context of KiwiSaver/Superannuation fund investments, it is applicable to other forms of investments as well.
Around 2 and half years ago, when global financial crisis started, most of the investors were reluctant to invest money in growth assets (Growth Assets are assets such as shares, properties etc.). They were more inclined to put their money into Conservative portfolios comprising primarily Debt securities (Fixed interest securities, cash assets etc.).
After a year or so, when they looked at the fact that Growth funds had given better returns, some of the investors moved their funds from conservative to growth portfolios. Now during last few weeks when world stock prices have gone down, we have been receiving few queries from worried investors who want to shift from Growth funds to conservative funds. Investors tend to make irrational decisions during turbulent times.
The investors should understand the investments well before making any decisions.
Remember, it is a general principle of investing that your investments should be well diversified. Most of people don’t have adequate savings to invest in a wide variety of assets classes or in a wide range of securities comprised in that asset class.
Through KiwiSaver funds or other managed funds, small investors can reap the advantages of diversification. These funds invest in wide range of national and international securities resulting in spreading of risk. But this diversification works better if you hold your investments through good and bad period of markets. In bad times, share values of even top class companies go down. Though some adjustments to your investments may be needed at some stage, it is very unwise to sell the investments at that stage.
History tells us that in the longer run, Growth assets namely shares and property have been best performing assets and those investors who stay put in bad times reap richer rewards as compared to those who get panicky and move out of markets when markets are down. Worse are investors who jump into markets when these are up and get out of markets when these are down. The best strategy should be to do exactly the reverse.
According to a US study (source: cnbc.com) of performance of 7.1 million 401(k) accounts, the above has been proved. The key findings of this study are-
• Participants who changed their equity allocations to zero percent between Oct. 1, 2008, and Mar. 31, 2009 and stayed out of stocks through June 30 this year saw an average increase in account balance of only 2 percent.
• Participants who exited stocks but then returned to some level of equity allocation after that market decline saw average account balance increases of 25 percent.
• Investors who stuck it out with a continuous asset allocation strategy that included stocks had an average account balance increase of 50 percent.
As it is impossible to predict the trends in markets, systematic investment plans (SIP) are best way to invest. You cannot predict the perfect time to move into markets, so you should not wait but start investing regular sums of money at regular intervals into the markets. Automatically, with same amount of money, you buy less number of shares when markets are high and high number of shares when markets are low. It is called Dollar cost averaging. KiwiSaver investments are very good examples of Systematic investment plans where you can reap the advantages of Dollar cost averaging. You, your employer and IRD contribute to funds at regular intervals. The fund managers invest the money into securities at prices of securities prevailing at that time.
It does not mean that Growth Funds are always the best for you. It depends on time horizon you are looking to invest for and your personal risk profile. Normally younger you are, better you will be by investing in Growth Funds. But if you are approaching retirement or you are investing for shorter period of times, you may be better off investing in conservative funds. If you are unsure, seek the services of your Financial Adviser in this regard.
Note: This column has been written for general guidance only. The writer or Indian Weekender is not responsible for any loss suffered by anyone by acting on these recommendations. You should seek independent financial advice before acting on any of recommendations.
Ravi Mehta is an Auckland based Authorised Financial Adviser (AFA) and can be contacted on firstname.lastname@example.org. A disclosure statement as required under Securities Act 1988 is freely available on request.