OPINION: Apart from the Covid blip, the New Zealand share market has enjoyed a decade-long bull market. It's the kind of market that leads young investors to expect lightning-fast, sky-high returns.
There has been a noticeable increase in participation among young investors, helped by digital trading platforms.
But many of those in the market today have only experienced rising prices. And it's not just the share market that's gone up.
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House prices in New Zealand have been exceeding all expectations as well, but both property and equity markets don't always go up. When they fall, they often fall fast and can stay down, not just for years, but decades.
By way of an example, imagine an investor entering the New Zealand share market in the winter of 1989. Following the crash of 1987, it was surely a time to get back in, right?
Let's say they invested $100,000 in a portfolio of the 10 largest companies as represented by the NZX 10 Capital Index (as per the chart below), which accounts for the majority of our domestic market capitalisation.
Within 12 months the market fell 49 per cent, reducing the investment to $51,000, and wouldn't regain its value again until the winter of 1997.
Any feelings of relief would prove to be short-lived as the Asian debt crisis, followed by the bursting of the tech bubble in 2000, rocked global share markets. These events sent our investor’s portfolio back below the initial $100,000 investment for another half-decade.
It then only recovered to its entry price again in 2006, when it enjoyed an 11-month spell in the black, slightly above the original $100,000. That was, until the global financial crisis (GFC) sent markets into another tailspin and our poor investor was staring at a portfolio balance 40 per cent lower than their $100,000 investment from two decades earlier.
A slow recovery finally returned our investor's portfolio back above par in 2016, where this time it stayed and flourished – 25 years after they initially invested.
Now, our example ignores dividends which would have been paid along the way as capital growth is often the primary motivator for share market investors. In that respect, they share some similarities with many residential property investors who tend to brag about growth in their capital values but not about their rental income streams.
So, how will investors chasing quick wins deal with years of negative returns? And how will the firms and platforms themselves hold up when stresses mount?
The longer the party, the worse the hangover
How many investors will stay the course if their portfolio drops 25-50 per cent over a five-year period, let alone a decade? We have been in a bull market since the end of the GFC. That's a long party. Most often, what follows a really long party is a really bad hangover.
Financial market regulators are often focussed on lowering fees for investors because costs are tangible and easy to measure. While fees are important, the documented behaviour of investors acting like gamblers can be far more detrimental to their financial health and wellbeing.
Regulation around this issue is admittedly difficult. What we do know is that professional human financial advice mitigates some of the marketing pull and unfounded optimism that the markets will always rise and rise some more.
Expertise makes a difference
Getting advice from a qualified person is paramount, however financial advisers do charge for their expertise. Reassuringly, multiple studies have found that professional advisers add value, largely because they help shape investor behaviour.
US company Russell Investments recently explored the value good advice can add to personal wealth. Its report showed that financial advisers can add at least an annual 5.2 per cent to the value of their clients' portfolio even in difficult investment climates, and that's after fees.
Perhaps unsurprisingly, a good chunk of that gain comes from helping investors avoid bad decisions. Steering them away from impulsive investments and encouraging them not to sell, for example, during the panic of a global pandemic.
In fact, an FMA report showed that many millennial investors did just that by switching their KiwiSaver funds during the Covid-led market dip of March 2020.
An adviser with a wealth of experience and wisdom can explain and recommend diversification, along with the benefits of spreading funds between shares, property, bonds and cash both here and overseas.
They can guide investors away from risky investments towards solid long-term returns. Financial advice can be as simple as setting up a plan for paying off a mortgage early, identifying retirement needs, and then choosing an investment and KiwiSaver plan that aligns with their goals – the everyday needs of everyday people.
That's not particularly glamorous, but it is sound.
While platforms such as Sharesies have made DIY investing easy, experience and evidence have shown us that investing is anything but. What's intuitive can often be misguided, and impulsive decision-making can often lead to poor long-term outcomes.
In this arena, experience counts and advice from a professional who can help steer you in the right direction to reach your financial goals adds a lot of value.
– Scott Alman is the managing director of Consilium.
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