Investing can feel like a pretty solitary and emotionally-driven pursuit, especially in times of
market volatility. Rationally, you know that there are both upsides and downsides to volatile
markets. And you know, based on history, that the markets will eventually rebound. But
even so, when you see your savings drop, emotions can be hard to rein in.
So, what can you do to break the cycle of emotional investing? Well In a recent podcast
from News of the Money World, co-hosted with NZ Everyday Investor’s Darcy Ungaro -
kōura Founder, Rupert Carlyon shared some ideas on how investors can make this
rollercoaster ride more comfortable. Here are some key takeaways:
It’s easy to get caught off guard
Let’s face it: downturns are not something most investors are used to. Rationally, we all
know that there will be ups and downs along the way; it’s just how investment markets
work. But having been in a bull market since 2009 (apart from the short interruption of the
Covid-19 crash in 2020), you’re probably not familiar with how downturns feel at a ‘gut
level’. That’s part of the reason why, during volatile times, controlling your emotions is so
challenging.
How behavioural biases get in the way
As an investor, your personal instincts are not the best tools for making good decisions.
Our emotions stem from a number of ingrained behavioural biases, like our natural
tendency to try and fix things (even when they’re outside of our control). Moving to a
lower-risk fund during a downturn is a typical example of how this mentality can hurt your
long-term investments. Your emotions tell you that you need to protect your investments
from falling further, but what you’re actually doing is selling when the market is low. And as
a result, you’re essentially ‘locking in’ your losses.
Another way that emotions affect investing is overconfidence in your own judgement. ‘I
know best’, says the overconfident investor – better than what the theory dictates, better
than what the markets assume. Unfortunately, markets move too fast to be predictable, and
overconfidence can often come at a dear price.
The bottom line? No one knows the future. You can only draw some lessons from the past –
and even so, always with a pinch of salt.
Learning and unlearning from the Covid-19 crash
The Covid-19 sudden downturn of March 2020 is still fresh in the memory of many investors
as the infamous ‘Big Switch’. That’s when the markets suddenly crashed and thousands of
KiwiSaver members (seven times more than average) switched into lower-risk fund types,
hoping to protect their hard-earned money. Little did they know that only six months later
markets would have completely recovered their losses. Unfortunately for them, the horse
had already bolted.
Two years on, thanks to that hard lesson, there seem to be more educated conversations
around KiwiSaver. More people have grown to understand KiwiSaver’s long-term nature and
the importance of staying the course, as long as their risk profile doesn’t change.
On the other hand, given how short-lived the Covid-19 downturn was, some people may be
under the assumption that this downturn will only last a few months. It may be the case –
no one knows for sure – but historical data suggests otherwise. On average, market
downturns last two to three years: so emotionally speaking, that’s the scenario that
investors need to prepare for.
Thinking of switching providers?
So, you’ve been happily invested with the same provider for quite some time, but over the
past couple of years, returns have been subpar. The question is, is a weak performance
reason enough to change providers?
The key thing is not to judge funds based on performance alone, but rather understand why
a provider has achieved certain returns. What’s their strategy? And does their asset
allocation align with your goals and values?
Also, keep in mind that, while providers may outperform the market on a one-year, three-
year, or even five-year basis, it’s very rare that they can continue to do so in the longer
term. And that’s why it’s a good idea to choose your provider based on fundamentals like
fees and asset allocation first, and performance second.
Meanwhile, here are three things you can do to keep emotions at bay
Even if you consider yourself a rational being, make sure you don’t underestimate how
much emotions affect your decision-making. That doesn’t mean being unemotional or
purely logical. It means identifying what’s driving you and turning down the noise, because
one of the worst things that you can do is to use short-term data to make long-term
decisions.
In our News of the Money World podcast episode, we touched on three practical tips to
keep yourself safe from yourself:
● First, flip the script and reframe what you’re going through into something positive.
Instead of looking at how much you’ve lost and can still lose, you can focus on the
opportunities ahead.
● Second, consider setting rules to avoid impulsive decision, like having a sort of waiting
period before any decisions can be made.
● And third, make sure you find people that you can talk with. Having conversations
about money can help you view things from another perspective, and with more clarity. It
could be your peers or, even better, a financial adviser. After all, it’s their job to challenge
you and share their knowledge, so that you can make better-informed decisions every step
of the way.
Still unsure?
Still unsure about things regarding your KiwiSaver account? Just ask kōura, They’re all about
empowering people on their lifelong financial journey, with quality digital advice. Click here
to find out more.
This content has been provided by KiwiSaver provider kōura Wealth as part of a paid
partnership.
Disclaimer: Please note that the content provided in this article is intended as an overview and as
general information only. While care is taken to ensure accuracy and reliability, the information
provided is subject to continuous change and may not reflect current developments or address
your situation. Before making any decisions based on the information provided in this article,
please use your discretion and seek independent guidance.