Insights
Accept risk as the down payment for getting something good

Even when years away from retirement, seeing volatility in your KiwiSaver can be hard to deal with. It can be the cause of lost sleep, it can also encourage people to do something, anything, to de-risk their investment.

Market risk refers to the possibility of financial loss due to fluctuations in market conditions. For example, a company could appoint a contentious CEO, media might cover this unfavourably, people decide to sell their stock in that company, the value of the stock drops. This is currently a widespread reaction to tariffs and economic uncertainty, which is leading to caution and even fear for stock market investors.

Yet when we focus on the here and now, things always seem much worse. If we were to only focus on the markets immediately after President Trump’s initial tariff announcement, we would see US shares down 10% over April 3 and 4. If we widened the focus to a week, we’d see them bounce back by close to 10% on April 9. If we zoomed out over multiple years, we would see recent moves as just something markets do from time to time.

This reminds me of Avion Grey’s advice about risk. Grey is the co-founder and CEO of the UK fintech called Belong, a company that provides loans to people who want to start investing now (to get the long-term benefits) but who don’t have the initial capital.

Grey talks about the risk related to investing as the admission fee to the party. Without it, you cannot get in. She reminds people that risk and reward are things we experience daily. When you’re in bed, too tired to get up, and you hit the ‘snooze’ button one more time, you’re risking being late for the reward of being more rested. You’re hoping you’ll get green lights all the way there, that traffic will be light, and that public transport is on time.

Risk is inherent in living and often the down payment for getting something good.

The current market conditions are reminding us that there’s no such thing as smooth sailing when it comes to investing; or life, for that matter.

In fact, the Stoics, ancient philosophers, felt sorry for people with stable lives, because dealing with setbacks and obstacles is where you develop character. They understood that there’s no avoiding setbacks, so learning the skills and mindset for dealing with them is the best approach.

What does dealing with setbacks during market volatility look like? Accepting the price of admission (that you don’t get something from nothing), making sure you’re in the right fund type for you (deal with the things you can control) and being patient (this too shall pass).

What evidence do we have that it will pass? Well, market swings in February and March 2020 responding to the Covid-19 disruption are a powerful example. The US market fell over 30%, yet within six months it had regained its previous highs.

It was a similar pattern, although played out over a longer period, for the 1999 dot-com crash and the Global Financial Crisis. I was working on the trading floor of an investment bank through each. These were particularly unpredictable and stressful times, often verging on chaotic. The point is not the volatility, but the fact that markets recovered from these stormy and uncharted waters.

A whole generation of Kiwi investors were put off buying shares by the 1987 market crash. The sharemarket rout in New Zealand was brutal, but the US market recovered all lost ground within two years.

It is a truism that every generation thinks theirs is the pinnacle – of good, bad, hard, you name it. The fear that this time markets will fail and stay down would have been felt during every previous downturn and yet, they didn’t. They went back up.

As a KiwiSaver investor, we need to accept that risk is the entry ticket for the allure of better long-term investment returns. We can’t avoid this risk, and we can’t avoid the market’s ups and downs that flow from Trump introducing, doubling and backtracking on tariffs.

Back to Grey and her thoughts on building wealth. She says “you need two things: you need time and money because you need the money to compound over time”. The ‘money’ is your KiwiSaver balance and the ‘time’ means staying invested with your strategy, despite the ups and downs.

If you still feel uneasy, seek advice. You can chat to your KiwiSaver provider or find a financial adviser.

This article was originally published in The Post - view it online here.