From market shake-up to portfolio makeover: how to get your assets into gear after a year in reverse
Article written by InvestNow – 22nd December 2022
As 2022 limps to the finish line, investors will be looking forward to better times ahead.
But most will inevitably gaze with horror at the scene captured in the rear-view mirror: it is carnage.
Following a turbulent 12-month period that saw almost all assets bleed red, the majority of investors are likely nursing double-digit losses even for diversified portfolios.
However, diversification still provided invaluable protection over 2022 as the small group of former speedy leaders (often clumped together in concentrated portfolios) spun off the track.
Former tech heroes Meta (the company once known as Facebook) and Tesla are down about 65% for the year while the Nasdaq-listed Kiwi high-flyer, Allbirds, is off over 85% from its perch.
Meanwhile, digital asset poster-kid, bitcoin, has dropped about 60% during the previous 12 months, straining the belief (and wealth) of all-in true-believers.
Investors who piled into these now-crashing assets are facing a serious wealth wipe-out; by contrast, those riding in diversified options were better placed to weather the storm, with the Foundation Series Balanced Fund, for example, behind just 11.5% for the year.
If 2022 again showcased the benefits of building diversified portfolios, this year’s market turbulence – which included a rare negative period for both bonds and equities – serves as a reminder for investors to ensure their strategies remain in tune.
Regular reviews should be part of any good investment maintenance plan but the calendar year-end is the perfect time to take stock of material changes – both financial and personal – that might require a portfolio overhaul.
Important life milestones (baby, marriage, retirement, for example) will certainly impact portfolio planning regardless of what happened in investment markets.
During the previous 12 months, however, financial markets experienced some of the most dramatic action seen for decades as COVID-era optimism slammed into reverse.
Seeing red: global markets 2022 recap
Rounding the bend into 2022 most market observers expected the good times of the past 18 months or so to roll on, sustained by low interest rates, strong economic growth and fading pandemic fears.
The investment party continued amid optimism of a stable post-COVID return to normality featuring international travel and mask-free indoor gatherings.
Just a few days into the year, though, the music abruptly stopped.
Markets, in fact, peaked early in January – even before the February Russian invasion of Ukraine – as inflationary fears came to the fore.
Within months inflation was hitting multi-decade highs in most countries including NZ (7.3%), US (9.1%), Europe (10.6%) and UK (11.1%). Other more fragile economies suffered even worse with Argentina effectively racking up 100% inflation year-on-year – the recent World Cup win offering a nice distraction from the financial disaster.
The direct impact of rising prices flowed quickly into the daily news narrative as the ‘cost-of-living crisis’, illustrated here by shock coverage of $20 cheese blocks and one-year mortgage rate jumps from the low of 2.1% to the current rates of 6.5% and above.
As per their mandates, central banks acted quickly to hose down inflation with aggressive interest rate hikes. Over the last 12 months both the US and NZ monetary authorities, for instance, have lifted rates by an astonishing 4% plus from near-zero starting points.
Sharply rising rates spilled over to financial markets where almost all asset classes – particularly property, equities and bonds – repriced downwards, and fast. Some economies, too, have already slipped into recession while others, including NZ, are tipped to follow next year.
Year-to-date volatility has dragged most share markets down significantly including (in local currency terms) the:
- NZX50 (-13%),
- ASX200 (-8%);
- S&P 500 (-20%); and,
- MSCI World (-20%).
At the same time, bonds, which typically temper falling equities, also slid backwards in 2022 as the rapid rate hikes slashed capital values: the NZ bond index was down -6% for the year while the global fixed income benchmark reported a -10% loss (in NZ dollar terms).
Brake, don’t stop: turning the corner on bad news
Investors can easily take their eyes off the road amid headlines screaming ‘Crash!’.
And while investors should take note of the changing market conditions, it is also important to not over-react to incessant bad news by selling out and crystalising losses.
Coming after years of outsized gains (particularly over 2020 to near the end of 2021), investors were arguably due for a reversal to scrub out the excessive froth and risk-taking of the boom times. Historically, periods of volatility and negative returns have created a backdrop for more sustainable gains over the longer run.
Goal-oriented investors who have designed portfolios that take into account expected market ebbs-and-flows should not be swayed off-course by the latest bout of negativity.
Nevertheless, such long-term investors would still benefit from a year-end portfolio review – even if to just reaffirm their investment strategy with possibly a few tactical tweaks and rebalancing.
Annual market performance, though, is not the only – or even necessarily the most important – factor to consider in end-of-year investment reviews: personal lifestyle changes such as new family responsibilities, a higher-paid job, retirement or, perhaps, a rethink of risk tolerance, might all have a greater influence on your portfolio planning than a 5,000-stock pile-up.
Individual circumstances will, naturally, vary but a good portfolio review should include the following points:
Revisit your investment beliefs – investing is not a strict science – there are no universally agreed upon approaches to many questions when it comes to the financial markets. Here’s a few to consider:
- Is low-cost passive management always the most appropriate way to invest?
- Can active managers really add long-term value? Or is it best to use a mix of index and active funds depending on the asset class?
- To what extent are asset class returns predictable or mean-reverting?
- How much diversification is enough?
- Does sustainable investing matter? If so, is it better to invest in funds that screen out ‘bad’ companies or with those that work with firms to improve corporate behaviour?
The answers will range according to individual taste but to make informed views on investment beliefs, read widely. InvestNow, for example, has a growing resource base of market insights, research and other materials to help.
Reassess your investment goals – things change – career, family, health, personal and financial circumstances are all constantly evolving. Investment goals should move in line with the shifting life dynamics.
Goal-setting helps clarify why you are investing and what the next steps might be. It’s helpful to take a step back at year-end and ask questions such as:
- Have any significant life events occurred – marriage, a new child or divorce, for example;
- Has my financial situation changed – big pay hike, job loss, inheritance; and
- Has my investment horizon changed – retirement delay or urgent cash need?
Recalibrate your risk tolerance – most investors report a high risk tolerance when markets are booming. But when markets falter – just as we’ve seen over the past year – investors get a true sense of their risk tolerance.
If you felt queasy and panic-sold investments in 2022 at the sign of the smallest dip, or personal circumstances have changed (see above point), then it may help to reassess your risk tolerance and what type of investments would suit you best.
For a helpful risk tolerance assessment try out the Sorted ‘Investor profiler’ tool.
Review your investment strategy and asset allocation – your investment beliefs, goals and risk tolerance will all influence your investment strategy and accordingly your target portfolio asset allocation (simply, the mix of growth and income assets your portfolio should have, given your investment objectives and constraints).
Ultimately, it is important to ensure that the investment strategy and target asset allocation set matches your risk tolerance, financial situation, and time horizon, and that the targeted assets align with overarching market conditions.
Rebalance your portfolio – the nitty-gritty buying and selling of funds in your InvestNow portfolio follows on from the previous steps. Does the risk profile of your existing portfolio match the target asset allocation? If not, which funds do you need to buy or sell?
Finally, a review of your underlying investments beyond just the performance is also important, as the strategy of the underlying investment solution may have changed. Investments are not static. Just as your goals can change, so can the objectives of your underlying investments.
For instance, the ‘Macquarie Australasian Property Index Fund’ (available on InvestNow) recently removed its allocation to NZ property due to an investment strategy change and now only invests into Australian property. The fund is thus renamed the ‘Macquarie Australian Property Index Fund’ and an investor whose investment strategy involved getting diversified exposure to both NZ and Australian property securities would discover in their investment review that this solution is no longer suitable to address their investment goals.
Rectify any administrative details – keep your personal details up to date. Check your InvestNow account and make sure your personal details are correct – including details such as your tax rate, PIR rate, phone number, address, email and so on. Importantly, complete any outstanding AML action items if this is applicable to you.
The InvestNow review toolkit
InvestNow has a range of sophisticated tools available to help investors navigate through the portfolio review journey with a few including:
- InvestNow historical Managed Fund performance table – Shows the fund performance for the Managed Funds on InvestNow, for the previous month;
- InvestNow Articles – Market insights, research, etc; and,
- And more – which you can view here on our InvestNow Resources & Tools page
InvestNow wishes you all the best for the year ahead; may the road rise with you (but drive safe).
From market shake-up to portfolio makeover: how to get your assets into gear after a year in reverse
Article written by InvestNow – 22nd December 2022
As 2022 limps to the finish line, investors will be looking forward to better times ahead.
But most will inevitably gaze with horror at the scene captured in the rear-view mirror: it is carnage.
Following a turbulent 12-month period that saw almost all assets bleed red, the majority of investors are likely nursing double-digit losses even for diversified portfolios.
However, diversification still provided invaluable protection over 2022 as the small group of former speedy leaders (often clumped together in concentrated portfolios) spun off the track.
Former tech heroes Meta (the company once known as Facebook) and Tesla are down about 65% for the year while the Nasdaq-listed Kiwi high-flyer, Allbirds, is off over 85% from its perch.
Meanwhile, digital asset poster-kid, bitcoin, has dropped about 60% during the previous 12 months, straining the belief (and wealth) of all-in true-believers.
Investors who piled into these now-crashing assets are facing a serious wealth wipe-out; by contrast, those riding in diversified options were better placed to weather the storm, with the Foundation Series Balanced Fund, for example, behind just 11.5% for the year.
If 2022 again showcased the benefits of building diversified portfolios, this year’s market turbulence – which included a rare negative period for both bonds and equities – serves as a reminder for investors to ensure their strategies remain in tune.
Regular reviews should be part of any good investment maintenance plan but the calendar year-end is the perfect time to take stock of material changes – both financial and personal – that might require a portfolio overhaul.
Important life milestones (baby, marriage, retirement, for example) will certainly impact portfolio planning regardless of what happened in investment markets.
During the previous 12 months, however, financial markets experienced some of the most dramatic action seen for decades as COVID-era optimism slammed into reverse.
Seeing red: global markets 2022 recap
Rounding the bend into 2022 most market observers expected the good times of the past 18 months or so to roll on, sustained by low interest rates, strong economic growth and fading pandemic fears.
The investment party continued amid optimism of a stable post-COVID return to normality featuring international travel and mask-free indoor gatherings.
Just a few days into the year, though, the music abruptly stopped.
Markets, in fact, peaked early in January – even before the February Russian invasion of Ukraine – as inflationary fears came to the fore.
Within months inflation was hitting multi-decade highs in most countries including NZ (7.3%), US (9.1%), Europe (10.6%) and UK (11.1%). Other more fragile economies suffered even worse with Argentina effectively racking up 100% inflation year-on-year – the recent World Cup win offering a nice distraction from the financial disaster.
The direct impact of rising prices flowed quickly into the daily news narrative as the ‘cost-of-living crisis’, illustrated here by shock coverage of $20 cheese blocks and one-year mortgage rate jumps from the low of 2.1% to the current rates of 6.5% and above.
As per their mandates, central banks acted quickly to hose down inflation with aggressive interest rate hikes. Over the last 12 months both the US and NZ monetary authorities, for instance, have lifted rates by an astonishing 4% plus from near-zero starting points.
Sharply rising rates spilled over to financial markets where almost all asset classes – particularly property, equities and bonds – repriced downwards, and fast. Some economies, too, have already slipped into recession while others, including NZ, are tipped to follow next year.
Year-to-date volatility has dragged most share markets down significantly including (in local currency terms) the:
- NZX50 (-13%),
- ASX200 (-8%);
- S&P 500 (-20%); and,
- MSCI World (-20%).
At the same time, bonds, which typically temper falling equities, also slid backwards in 2022 as the rapid rate hikes slashed capital values: the NZ bond index was down -6% for the year while the global fixed income benchmark reported a -10% loss (in NZ dollar terms).
Brake, don’t stop: turning the corner on bad news
Investors can easily take their eyes off the road amid headlines screaming ‘Crash!’.
And while investors should take note of the changing market conditions, it is also important to not over-react to incessant bad news by selling out and crystalising losses.
Coming after years of outsized gains (particularly over 2020 to near the end of 2021), investors were arguably due for a reversal to scrub out the excessive froth and risk-taking of the boom times. Historically, periods of volatility and negative returns have created a backdrop for more sustainable gains over the longer run.
Goal-oriented investors who have designed portfolios that take into account expected market ebbs-and-flows should not be swayed off-course by the latest bout of negativity.
Nevertheless, such long-term investors would still benefit from a year-end portfolio review – even if to just reaffirm their investment strategy with possibly a few tactical tweaks and rebalancing.
Annual market performance, though, is not the only – or even necessarily the most important – factor to consider in end-of-year investment reviews: personal lifestyle changes such as new family responsibilities, a higher-paid job, retirement or, perhaps, a rethink of risk tolerance, might all have a greater influence on your portfolio planning than a 5,000-stock pile-up.
Individual circumstances will, naturally, vary but a good portfolio review should include the following points:
Revisit your investment beliefs – investing is not a strict science – there are no universally agreed upon approaches to many questions when it comes to the financial markets. Here’s a few to consider:
- Is low-cost passive management always the most appropriate way to invest?
- Can active managers really add long-term value? Or is it best to use a mix of index and active funds depending on the asset class?
- To what extent are asset class returns predictable or mean-reverting?
- How much diversification is enough?
- Does sustainable investing matter? If so, is it better to invest in funds that screen out ‘bad’ companies or with those that work with firms to improve corporate behaviour?
The answers will range according to individual taste but to make informed views on investment beliefs, read widely. InvestNow, for example, has a growing resource base of market insights, research and other materials to help.
Reassess your investment goals – things change – career, family, health, personal and financial circumstances are all constantly evolving. Investment goals should move in line with the shifting life dynamics.
Goal-setting helps clarify why you are investing and what the next steps might be. It’s helpful to take a step back at year-end and ask questions such as:
- Have any significant life events occurred – marriage, a new child or divorce, for example;
- Has my financial situation changed – big pay hike, job loss, inheritance; and
- Has my investment horizon changed – retirement delay or urgent cash need?
Recalibrate your risk tolerance – most investors report a high risk tolerance when markets are booming. But when markets falter – just as we’ve seen over the past year – investors get a true sense of their risk tolerance.
If you felt queasy and panic-sold investments in 2022 at the sign of the smallest dip, or personal circumstances have changed (see above point), then it may help to reassess your risk tolerance and what type of investments would suit you best.
For a helpful risk tolerance assessment try out the Sorted ‘Investor profiler’ tool.
Review your investment strategy and asset allocation – your investment beliefs, goals and risk tolerance will all influence your investment strategy and accordingly your target portfolio asset allocation (simply, the mix of growth and income assets your portfolio should have, given your investment objectives and constraints).
Ultimately, it is important to ensure that the investment strategy and target asset allocation set matches your risk tolerance, financial situation, and time horizon, and that the targeted assets align with overarching market conditions.
Rebalance your portfolio – the nitty-gritty buying and selling of funds in your InvestNow portfolio follows on from the previous steps. Does the risk profile of your existing portfolio match the target asset allocation? If not, which funds do you need to buy or sell?
Finally, a review of your underlying investments beyond just the performance is also important, as the strategy of the underlying investment solution may have changed. Investments are not static. Just as your goals can change, so can the objectives of your underlying investments.
For instance, the ‘Macquarie Australasian Property Index Fund’ (available on InvestNow) recently removed its allocation to NZ property due to an investment strategy change and now only invests into Australian property. The fund is thus renamed the ‘Macquarie Australian Property Index Fund’ and an investor whose investment strategy involved getting diversified exposure to both NZ and Australian property securities would discover in their investment review that this solution is no longer suitable to address their investment goals.
Rectify any administrative details – keep your personal details up to date. Check your InvestNow account and make sure your personal details are correct – including details such as your tax rate, PIR rate, phone number, address, email and so on. Importantly, complete any outstanding AML action items if this is applicable to you.
The InvestNow review toolkit
InvestNow has a range of sophisticated tools available to help investors navigate through the portfolio review journey with a few including:
- InvestNow historical Managed Fund performance table – Shows the fund performance for the Managed Funds on InvestNow, for the previous month;
- InvestNow Articles – Market insights, research, etc; and,
- And more – which you can view here on our InvestNow Resources & Tools page
InvestNow wishes you all the best for the year ahead; may the road rise with you (but drive safe).
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