Riding the Rollercoaster

I recently heard a great analogy.  Investing is like riding a roller coaster.  There is the feeling of euphoria when hitting the heights, the fear of the falling, the nausea of reaching the bottom and the relief when your carriage starts to climb again, only to do it all over again.  Investing is similar with the markets taking investors on similar journeys.  Would you ever think to jump out of the roller coaster ride?  No, because you would risk your life. 

Staying in to the end is a rewarding experience that you often want to do again.

Nothing ever happens without taking on risk.  To live a long life, you would be safest to stay indoors.

What are we talking about when we use the word risk in relation to investing?

Well, there are different kinds of risk.  Let’s look at what these are:

• There’s the risk of never getting your money back - Permanent loss.
• There’s the risk of your money dropping in value.  – Temporary loss.
• There’s the leverage risk (lots of jargon here that we’ll explain later)
• There’s the risk of not doing anything. 

• Recency bias – Things have been going up, so I better get in now.  Things have been dropping so I better get out.  Decide what you want to achieve and follow a plan.
• Performance – This asset, manager, sector, country has been going crazy, is delivering great returns. I better get in or I will miss out.  Otherwise known as FOMO. (Fear of missing out)  There are plenty of asset managers that take significant risks which achieve grand returns.
• Attachment to a company or asset class.  People hear about a company that is doing really great stuff.  That’s great, does it fit into a good investment strategy?  Possibly, but highly likely it should only make up a small portion of your investment.

Finally, there is the risk of doing nothing other than leaving your funds in cash (savings accounts, term deposits).  The average cash rate for the last 10 years has been 1.97%  an Aggressive share fund has averaged 10.3% (Official cash rate and Booster Geared growth fund, supplied by Booster).

If you save $500 a month for 40 years, investing in cash at the return listed above, you will achieve $216,798.  Investing in an aggressive fund, with a return listed above will achieve $1,451,439.  This is before tax and takes into account inflation (Deducts 2% of the return for the impact of inflation).

What difference would that make to your retirement?

Back to the roller coaster analogy.  The massive difference in your retirement fund is your reward for staying in your seat through the different feelings of euphoria, fear, contentless.  Pulling out of an investment for just a few days can have a massive impact.



 

By Tony Alexander

On September 12 Treasury released updated forecasts for the economy and the government’s accounts as they are required to do ahead of a general election. Media reporting focussed on the better than expected outlook for the economy and the risk of higher interest rates. But they missed something important.
 
The cut-off date for Treasury’s forecasts was August 2. Since then we have seen a substantial cut to Fonterra’s prediction of their dairy payout this year to a mid-point of $6.75 from $8.0. Following that I have received a high number of comments from businesses exposed to the farming sector that farmers are closing their wallets.
 
This means weak growth if any lies ahead for many regions in New Zealand through into late-2024 and the situation could be worsened by a second new negative. There appears to be an El Nino weather pattern development and if this happens then we can expect drought in many parts of New Zealand including the east coast of both islands.
 
The crunch to farm income will eventually weaken the overall pace of growth in the economy and this will have two main impacts. First, it reinforces the view I have stated many times that this housing cycle will be led by the cities and Auckland in particular while the regions lag. This lag will be accentuated by the migration boom which will greatly accelerate Auckland’s population growth rate more than any other region around the country.
 
The second major effect from reduced farm incomes will be weaker than anticipated inflation and that in turn increases the scope for interest rates to be cut through 2024 – the exact opposite of what was implied by Treasury’s already out of date predictions.
 
For borrowers the upshot is that continuing a focus on terms less than two years is likely to remain optimal.

For additional information on the economy, housing market, and interest rates, you can subscribe to Tony’s free weekly Tony’s View publication at www.tonyalexander.nz


Disclaimer:  This newsletter is meant to be informative and engaging, hopefully not a cure for insomnia.  Please don't take this as personalised financial advice.  Discuss your situation with an Advisor.  This is where I need to say past returns are no guarantee of future returns.