How to stay on target as market bullets wake the share bears

Almost a year ago to the day InvestNow asked its clients how they would respond if markets fell into bear territory: the answer was a collective ‘meh’.

The-then theoretical prospect of a crash didn’t appear to bother most InvestNow clients: just 3 per cent of those surveyed said they would sell out of share funds if equity markets dropped by 30 per cent in a couple of weeks.

Investors, though, don’t usually win medals for bravery in the face of theory. And for most of the 12 months following our survey, reality has hardly tested investors’ courage. Data from Auckland-based investment consultancy firm Melville Jessup Weaver (MJW) shows local and unhedged global share market indices were both up about 20 per cent over the 12 – almost uniformly calm – months to the end of September.

The final quarter of 2018, however, has put investors under real fire for the first time in years. During October both the NZX and global share markets were down about 9 per cent – a period that has included daily falls of 3 per cent or more.

Admittedly, the circa 9 per cent decline in October (to date) doesn’t quite meet our 2017 survey crash standards of rapid 10 per cent and 30 per cent falls – but investors have still had to dodge a few bullets.

So have InvestNow clients hunkered down as suggested by last year’s survey; or surrendered as the first shots of real volatility whizz past their portfolios?

Our follow-up survey late in October found just 4 per cent of respondents sold into the volatility with only 1 per cent selling all their share fund investments.

Furthermore, 70 per cent of those surveyed said they either did nothing or carried out research as shares wobbled – right on cue with the 2017 result showing 68 per cent of InvestNow clients would hold on if markets fell 10 per cent in a week.

The 2017 survey also accurately predicted the proportion of our investors who ‘bought the dip’. Last year 30 per cent of respondents said they would buy more equity funds if markets fell sharply compared to the 26 per cent who followed through on that promise this October.

According to Anthony Edmonds, InvestNow founder, the platform trading data backs up the survey result showing that the majority of clients held their positions during the October onslaught.

“We haven’t seen evidence of much, if any, panic trading on the platform as the bad news hit share markets this month,” Edmonds says. “It’s good to see that our clients are maintaining their long-term strategies rather than reacting to daily market noise.”

He says given InvestNow clients tend to be self-directed, market-savvy investors it would have been surprising to see them sell-down share fund holdings in response to short-term volatility.

However, he says while some InvestNow clients may have previously been through serious bear markets (such as the GFC), for others the October decline might have been their first exposure to significant paper losses.

“As well as experienced self-directed investors, we have many younger clients on InvestNow – quite a few who use index funds – who probably haven’t seen their portfolios down more than 5 per cent in a day or so,” Edmonds says. “The fact that those younger investors have not panicked suggests to me they are well-educated on how markets can behave – and act accordingly.”

Indeed, the October 2018 survey found 90 per cent of respondents who held firm or bought more were prepared for volatility and acted accordingly: a further 10 per cent were following ‘dollar cost averaging’ strategies designed to ignore market movements. Of those who sold down their equity exposure post-dip, 65 per cent said they were rebalancing portfolios with only 35 per cent selling in anticipation of a ‘bigger correction’.

Edmonds says the October movement likely won’t be the last – or the worst – skirmish with volatility investors will have to face.

“What’s important is that investors in equity funds understand their investment time-frame and how much risk they are willing to take on to earn the long-term returns share markets generally provide,” Edmonds says. “As we reminded investors last year – $10,000 invested in a NZ dollar-hedged global share index in 1999 would have tripled in value by September 2017.”

That tripling in value, though, occurred when share markets fell in about 40 per cent of the calendar months across the 18-year period. Furthermore, in the worst 12-month stretch the same NZ dollar-hedged global shares portfolio would’ve been down by about 40 per cent.

As the 2018 survey shows, most InvestNow clients are pretty comfortable with the concept of market turbulence, and how to fly through it: almost 70 per cent of respondents said they would not change their investing behaviour over the next six months. However, for some, at least, the arrival of real volatility has given pause for thought with about 30 per cent indicating they develop their investment plans over the next six months. Just 5 per cent planned to bail out into less risky investments over the same time period.

“Clearly, the volatility we’ve seen in October fits in with the historical pattern of share markets,” Edmonds says. “But that doesn’t make it any easier to predict what’s going to happen in the short term.

“We’re pleased to see that InvestNow clients are sticking to their guns even as share markets are firing a few warning shots.”

By |2018-11-02T10:39:03+00:00October 30th, 2018|Uncategorised|0 Comments